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29 Jan 2016
Metals: Reeling under Chinese deflationary woes – Danske Bank
FXStreet (Delhi) – Research Team at Danske Bank, suggests that as China continues to dump steel on the global market as excess capacity is being run down and this development highlights the main concern for the base metal market as 2016 sets off.
Key Quotes
“Real economic growth and income growth in China have slowed, which has led to surplus production in the aluminium and copper market. Slowing manufacturing activity in developed markets adds to the slump in base metal demand. We see no room for improvement in this situation in the coming months.
Rather we are looking towards the second half of the year, when global real economic growth and income growth might become supportive factors for base metal demand helped by a weaker USD and CNY. In 2017 we expect a further recovery in demand. The supply side of the market is another story, however.
Last year the process of adjusting to a situation without rapid growth in the Chinese market started in the upstream market. This has been visible in large mining economies such as Australia and Brazil. We expect this process to accelerate in 2016 and to continue in 2017. Note that aluminium, copper and zinc stocks have all declined in recent years, while nickel stocks remained elevated.
Price outlook
Overall, stronger global real economic growth and income growth towards the end of the year plus a weaker USD and CNY are set to support a recovery in base metal prices. Furthermore, declining stock levels raise risk of supply constraints in the base metal market should demand growth surprise positively or a supply disruption occur as production growth is expected to remain weak in the coming years. This is less of a concern in the nickel market where the stock level remains high.
We forecast the price for LME aluminium 3M to average USD1,550/MT and USD1,825/MT, the price for LME copper 3M to average USD4,650/MT and USD5,250/MT, the price for LME nickel 3M to average USD9,500/MT and USD11,500/MT and the price for LME zinc 3M to average USD1,625/MT and USD1,925/MT in 2016 and 2017 respectively.
All forecasts for 2016 have been revised down reflecting lower global real economic growth and income growth expectations. The base metal market in particular will keep an eye on how China manages its exchange rate in the coming months.
If People’s Bank of China’s need to intervene in the FX market to support the CNY eases, either because of declining expectations of US rate hikes this year or because of a weakening of the CNY, we expect base metal prices to react positively and vice versa. However, confusion about the direction of China’s FX policy is likely to continue to be a source of volatility for base metal prices.
Hedging recommendation
In our view, the relatively flat forward curves of the major base metals reflect a too downbeat outlook for the global economy and base metal demand the coming years along with the gradual adjustments in base metal production starting to take place. Consequently, we recommend consumers to hedge exposure in H2 16 and in 2017 at current low levels.”
Key Quotes
“Real economic growth and income growth in China have slowed, which has led to surplus production in the aluminium and copper market. Slowing manufacturing activity in developed markets adds to the slump in base metal demand. We see no room for improvement in this situation in the coming months.
Rather we are looking towards the second half of the year, when global real economic growth and income growth might become supportive factors for base metal demand helped by a weaker USD and CNY. In 2017 we expect a further recovery in demand. The supply side of the market is another story, however.
Last year the process of adjusting to a situation without rapid growth in the Chinese market started in the upstream market. This has been visible in large mining economies such as Australia and Brazil. We expect this process to accelerate in 2016 and to continue in 2017. Note that aluminium, copper and zinc stocks have all declined in recent years, while nickel stocks remained elevated.
Price outlook
Overall, stronger global real economic growth and income growth towards the end of the year plus a weaker USD and CNY are set to support a recovery in base metal prices. Furthermore, declining stock levels raise risk of supply constraints in the base metal market should demand growth surprise positively or a supply disruption occur as production growth is expected to remain weak in the coming years. This is less of a concern in the nickel market where the stock level remains high.
We forecast the price for LME aluminium 3M to average USD1,550/MT and USD1,825/MT, the price for LME copper 3M to average USD4,650/MT and USD5,250/MT, the price for LME nickel 3M to average USD9,500/MT and USD11,500/MT and the price for LME zinc 3M to average USD1,625/MT and USD1,925/MT in 2016 and 2017 respectively.
All forecasts for 2016 have been revised down reflecting lower global real economic growth and income growth expectations. The base metal market in particular will keep an eye on how China manages its exchange rate in the coming months.
If People’s Bank of China’s need to intervene in the FX market to support the CNY eases, either because of declining expectations of US rate hikes this year or because of a weakening of the CNY, we expect base metal prices to react positively and vice versa. However, confusion about the direction of China’s FX policy is likely to continue to be a source of volatility for base metal prices.
Hedging recommendation
In our view, the relatively flat forward curves of the major base metals reflect a too downbeat outlook for the global economy and base metal demand the coming years along with the gradual adjustments in base metal production starting to take place. Consequently, we recommend consumers to hedge exposure in H2 16 and in 2017 at current low levels.”