lme 2020 market insights - edfmancapital.com · lme 2020 market insights written by edward meir –...

2019 Overview: Compared to 2018 when all six LME metals limped into year-end at their lows, 2019 started off with a bang. Copper, zinc and nickel all kicked off the year with their best quarterly rise in some seven years on optimism about a US/China trade truce (reached in the wake of the De-cember 2018 Argentine summit), low metal inventories, supply glitches and hopes that the dovish rate tilt by central banks would jump-start demand. But all these bullish flames flickered out over the spring and summer months and by year-end, only cop-per and nickel managed to finish up on the year (by 4% and 32% respectively), while the other four metals saw modest declines: -7% (for zinc), -3% (ali), -12% (tin) and -4% (lead; see our charts below).

Two key variables were behind the disap-pointing performance in 2019, both of which we highlighted as strong possibilities in last

LME Price Ranges for 2020* (3-months)

Metal 2020 High 2020 Low Average

Copper (p. 10) $6,560 $5,518 $6,090Aluminum (p. 15) $1,950 $1,680 $1,780

Zinc (p.20) $2,620 $2,020 $2,310Lead (p. 23) $2,180 $1,773 $1,920Nickel (p. 26) $16,600 $11,300 $13,900

Tin (p. 31) $18,800 $15,425 $16,800

Comparisons of 2019 Ranges vs. Actual Levels (by year-end 2019)Metal Range Actual High Range Actual Low Avg Range. Actual Avg (ytd)**

Copper 7,220 6,608 5,650 5,518 6,190 6,020Alum. 2,330 1,951 1,720 1,705 1,950 1,813Zinc 3,210 2,958 2,150 2,190 2,320 2,507Lead 2,350 2,192 1,680 1,773 1,920 2,006Nickel 14,400 18,850 9,850 10,525 11,100 13,970Tin 21,300 21,800 16,800 15,565 18,910 18,585

LME 2020 Market InsightsWritten by Edward Meir – Commodity Research Group Tel: 1-203-656-1143 • [email protected] WWW.EDFMANCAPITAL.COM

year’s outlook. For starters, we wrote at the time that the continued trade standoff between China and the US would likely drag on, keeping trade uncertainties elevated, increasing supply-chain costs and hindering capex and cross-border investment -- all of which happened.

We also called for global economies to slow across the board during 2019 and if anything, the deceleration was even more pronounced than we thought, especially in China. (See our PMI charts on the next page). Furthermore, we did not think that the relatively low level of LME stocks and restrained mine output (widely expected at the start of 2019) would “bail” prices out either and neither did we see “Chinese stimulus spend-ing” coming to the rescue of the metals group either.

We concluded last year’s note by saying that “all in all, we see metals trading very much like they did in 2018, basically a sideways to somewhat lower slog where rallies will be vulnerable and new lows attainable, although we are not looking for a revisit of the 2015/16 troughs”.

*Price indications only and not be used for trading pruposes. Edward Meir/Commodity Research Group (“CRG) is an independent consultant to E D & F Man Capital Markets Inc. (“MCM ”) focusing on metals commentary. Neither Edward Meir or CRG have a personal futures trading accounts. The information contained in this material should be construed as market commentary, merely observing economic, political and/or market conditions, and not intended to refer to any particular trading strategy, or specific trade recommendation, promotional element or quality of services provided by MCM Inc. or E D & F Man Derivatives Products Inc. (“MDP”). Trading ranges given are not a reason to buy, sell or hold any commodity mentioned. MCM and MDP are not responsible for any redistribution of this material by third parties, or any trading decisions taken by persons not intended to view this material. Information contained herein was obtained from sources believed to be reliable but is not guaranteed as to its accuracy. These materials represent the opinions and viewpoints of the author, and do not necessarily reflect the viewpoints and any trading strategy employed by MCM or MDP. This is not an offer to buy or sell any derivative. The information and data provided is not tradable and is for indication-only purposes. All references to and discussion of OTC products or swaps are made solely on behalf of MDP, a member of the NFA and provisionally registered with the CFTC as a Swap Dealer. MDP’s products are designed only for individuals or firms who qualify under CFTC rules as an ECP and who have been accepted as customers of MDP. The trading of derivatives such as futures, options and OTC products or swaps may not be suitable for all investors. Derivative trading involves substantial risk of loss, and you should fully understand those risks prior to trading.

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Performance in 2019

Only two of the four metals man-aged to gain ground over the course of 2019, and of the two, copper’s 4% gain was relatively modest.Source: Bloomberg

Base Metals Overview 2020 - page 2

Edward Meir/Commodity Research Group (“CRG) is an independent consultant to E D & F Man Capital Markets Inc. (“MCM ”) focusing on metals commentary. Neither Edward Meir or CRG have a personal futures trading ac-counts. The information contained in this material should be construed as market commentary, merely observing economic, political and/or market conditions, and not intended to refer to any particular trading strategy, or specific trade recommendation, promotional element or quality of services provided by MCM Inc. or E D & F Man Derivatives Products Inc. (“MDP”). Trading ranges given are not a reason to buy, sell or hold any commodity mentioned. MCM and MDP are not responsible for any redistribution of this material by third parties, or any trading decisions taken by persons not intended to view this material. Information contained herein was obtained from sources believed to be reliable but is not guaranteed as to its accuracy. These materials represent the opinions and viewpoints of the author, and do not necessarily reflect the viewpoints and any trading strategy employed by MCM or MDP. This is not an offer to buy or sell any derivative. The information and data provided is not tradable and is for indication-only purposes. All references to and discussion of OTC products or swaps are made solely on behalf of MDP, a member of the NFA and provisionally registered with the CFTC as a Swap Dealer. MDP’s products are designed only for individuals or firms who qualify under CFTC rules as an ECP and who have been accepted as customers of MDP. The trading of derivatives such as futures, options and OTC products or swaps may not be suitable for all investors. Derivative trading involves substantial risk of loss, and you should fully understand those risks prior to trading.

As we can see from our table on page 1, when it came to our numbers, our average ranges were somewhat high for aluminum and copper, low for zinc, lead and nickel, but not off by wide margins. Our high projections were too optimistic for the most part. Nickel was the exception, as prices blew past our $14,400 range, getting to just under $19,000 at one point in August. In terms of our lows, our aluminum number was pretty much spot on, zinc was less than 2% off target, while lead, nickel and copper were off by 5%-10%.

Tariffs -- the verdict seems to be in: With almost a year and a half of “tariff time” behind us, an assessment of its effects was published by the Federal Reserve last month. The study concluded that the trade wars were a key factor in the broad 2019 slowdown in US manufacturing where output fell in seven of the last 11 months. The Fed conceded that aluminum, electric lighting, furniture, semiconductors and steel mills saw the most relative benefit from tariff protections, while companies that stamp, forge and process steel and aluminum into components and end-products suffered the most. Nevertheless, tariffs caused more manufacturing job losses than gains, with the Fed noting that a “small boost from the import protection effects of tariffs [was] more than offset by larger drags from the effects of rising input costs and retaliatory tariffs.”

The study also found that the US tariffs affected a wide swath of US companies, with nearly a third paying du-ties on some 46% of their purchases (totaling $46 billion last year), most of it passed on to the US consumer. The IMF’s assessment of the tariff damage was more damning than that of the Fed’s; the Fund estimates that the trade war will knock .8% from global GDP through 2020, equivalent to about $700 billion, or about the size of the Swiss economy. In response, companies have been trying to move supply chains out of China, but this has proved impractical or costly or both. A poll taken by Cowen and Co. showed that 28% of US firms moved their operations outside of China, often paying much more to non-Chinese facilities for less efficient process-ing. Of those polled, none moved their operations back to the US, but instead opted to go to already inundated factory workshops in Taiwan, Vietnam, India or Malaysia.

There were other casualties from the tariff moves. Global foreign direct investment contracted sharply in the 1st half of 2019, dropping by a whopping 20% in this six-month period vs. the previous six. Investments into the US fell by 25% in this period, with Chinese investment into the US off by a staggering 75%. In contrast, investment to China increased by 5%. Global trade also fell; the IMF projected trade volumes increased by just 1.1% in 2019 -- about a quarter of where they were in 2018. Lastly, the key US goal of the tariff war was not achieved; although the US trade deficit with China has fallen from the Oct 2018 record high of $43 billion, the current level of $26 billion is just about where we were two years ago before the tariff spat started.

The Phase-1 deal -- how much of it is attainable?: Metals turned higher in late December and into the first half of January, mainly on account of optimism surrounding the recently signed Phase-1 deal. As the deal reads, China has pledged to boost purchases of American exports by $200 billion over two years, including $80 billion in manufactured goods, $38 billion in services, $32 billion in farm products and $50 billion in energy.

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China US UK EurozoneSouth Korea Japan World

Global Manufacturing PMI’s

We saw a steady decline in PMI manufacturing readings for much of the year in pretty much all geographies, with only fainst signs of stabilization setting in by year-end.Source: IHS Markit



Much of the rest of the Phase-1 agreement is a laundry list of what the Chinese could buy, but importantly, there is no stipulation that commits them to doing so. Moreover, with mostly private companies supposedly contracting for these imports (as opposed to Chinese SOE’s) the economics may not make sense and so short of the Chinese government pledging to help, these purchases may not even materialize.

We don’t think there will be much headway in some of the other Phase-1 provisions either. To wit, China has promised to open its financial services sector to foreign competitors, but local banks have such a home-grown advantage in terms of scale (the biggest banks in the world are Chinese), that it would be difficult for any for-eign entity to compete. As things currently stand, only 1.7% of banks operating in China are foreign-owned.

So what happens if the Chinese fail to live up to the Phase 1 terms? In the event of a dispute, the two countries would need to go through three rounds of negotiations -- a kind of review and appeals process. If these fail, tariffs could be reimposed on Chinese imports into the US. The Chinese will not be able to retaliate or appeal, except by pulling out of the deal altogether.

In return, the deal cancels tariffs on $156 billion of Chinese goods, trims tariffs to 7.5% on a further $120 billion, but leaves in place 25% tariffs on $250 billion worth of imports. China’s retaliatory tariffs on over $100 billion stays where it is.

Despite the euphoria that greeted the news (particularly in US equity markets) we believe the Phase-1 deal is not going to be a significant game changer, let alone a precursor to a “successful” Phase-2 deal. Simply put, many of the import numbers the Chinese will need to hit are out of reach. Let’s look at soybeans to start; it took seventeen years for the US to build its Chinese soybeans exports from $3 billion in 2000 to $24 billion in 2017. These sales collapsed by about 70% in 2018 and by 50% in 2019 in the wake of the trade war. Nevertheless, under Phase-1, the Chinese are expected to not only increase their imports to the original 2017 levels, but to buy an additional $50 billion in farm goods over the next two years, the bulk of which needs to be soybeans if they stand a chance of hitting these numbers. Never mind that Chinese soybeans demand is already down on account of African Swine Fever, or the fact that Brazilian suppliers have already sold the Chinese 57 mil-lion tons of the 85 million tons of beans they bought last year. The chart below prepared by the USDA shows just how unrealistic these new US targets are; we note the pre-tariff dollar-based purchases the Chinese made from the US between 2010-2017 vs. the new proposed target and immediately sees just how much higher the new targets are. Keep in mind as well that when Chinese imports peaked several years ago, agricultural prices were much higher than where they are today, meaning that China would have to import much more in volume terms if they have a chance in hitting these dollar targets.

In the case of energy, the numbers look even more daunting. Phase-1 would have Chinese energy imports more than triple to $25 billion a year over two years from the 2017 baseline of $7 billion. China will not only have to buy more crude, but step up its LNG, LPG and its petrochemical imports to even have a chance of reaching these targets. In the meantime, other supply contracts it has on the books would have to be dis-placed.

Phase 1 agricul-tural targets


Edward Meir/Commodity Research Group (“CRG) is an independent consultant to E D & F Man Capital Markets Inc. (“MCM ”) focusing on metals commentary. Neither Edward Meir or CRG have a personal futures trading ac-counts. The information contained in this material should be construed as market commentary, merely observing economic, political and/or market conditions, and not intended to refer to any particular trading strategy, or specific trade recommendation, promotional element or quality of services provided by MCM Inc. or E D & F Man Derivatives Products Inc. (“MDP”). Trading ranges given are not a reason to buy, sell or hold any commodity mentioned. MCM and MDP are not responsible for any redistribution of this material by third parties, or any trading decisions taken by persons not intended to view this material. Information contained herein was obtained from sources believed to be reliable but is not guaranteed as to its accuracy. These materials represent the opinions and viewpoints of the author, and do not necessarily reflect the viewpoints and any trading strategy employed by MCM or MDP. This is not an offer to buy or sell any derivative. The information and data provided is not tradable and is for indication-only purposes. All references to and discussion of OTC products or swaps are made solely on behalf of MDP, a mem-ber of the NFA and provisionally registered with the CFTC as a Swap Dealer. MDP’s products are designed only for individuals or firms who qualify under CFTC rules as an ECP and who have been accepted as customers of MDP. The trading of derivatives such as futures, options and OTC products or swaps may not be suitable for all investors. Derivative trading involves substantial risk of loss, and you should fully understand those risks prior to trading.

Meanwhile, the more nettlesome issues separating the two sides have been rolled over into Phase-2, including intellectual property protection, industrial subsides and technology transfers. On subsidies, China has prom-ised better transparency and has already phased out state support for purchases of domestically-made electric vehicles, (which is why EV sales dropped so much this past year). But it will likely not agree to general subsidy withdrawals, as this is a central facet of its economy. If anything, subsidies will likely ramp up under the statist policies of President Xi.

On the issue of technology transfers, Beijing in the past has denied forcing US companies to transfer IP and insists that these transfers were either done on a “voluntary” basis or put through by rogue local officials who overstepped their mandate. Nevertheless, it has now passed a foreign investment law that formally bans “forced” transfers and has also sanctioned plans to phase out joint-venture requirements in autos and areas of finance. On cyber, China denies involvement in any alleged Beijing-backed hacking; this could be one of the more difficult aspects of the talks given the suspicions about dealings with Huawei.

Metals prices viewed through the trade prism: We think the trade “cloud” we saw holding back business spending last year will likely linger into this year as well, keeping a lid on metals demand. As one economist put it, “From a business perspective, if you know these tariffs can come back, you are still going to be cautious about your investment and hiring decisions”. In our view, what the global economy needs at this point is for the US/Chinese negotiations to not only resume in workmanlike fashion, but for tariffs to be rolled back, followed by a five-year tariff freeze. This would not only give the two sides enough time to reach a deal (or not), but would also allow businesses to start investing again in the interim. Chances of that happening under a Trump administration are slim to none, but on the flip side, negotiating trade deals cannot be reached through hurried talks or by tweet. As an aside, the comprehensive EU/Latin American trade accord that was announced (with-out much fanfare late last year) took 14 years to negotiate. We certainly are not advocating another 14-year process, but by the same token, Washington should not be making trade policies on the fly either.

However uncertain the US/Chinese trade outlook is, we at least have the US/Canada/Mexico trade agreement behind us. But with Section 232 tariffs still in place, there is the possibility that raw materials could flow into Mexico and Canada to be processed and exported back into the US despite the best efforts of the agreement to identify supply origins. This may be why the Trump administration this past week decided to hike tariffs on some imported “derivative” aluminium and steel products on several countries. But by exempting Argentina, Australia, Canada, Mexico, Brazil and South Korea, we doubt this move will be all that effective. We think imposing 232 tariffs (and tariffs in general) is a hopeless “whack-a-mole” exercise in an otherwise integrated global supply chain. In the case of 232, we suspect that the administration will eventually move away from tariffs and opt for a much more manageable quota system instead.

In Europe, the US has been sparring with France over proposed taxes on digital services and has threatened to impose tariffs if these are imposed. (France has postponed the increase for now). Although tensions on this issue have eased, the wider dispute with Europe over autos is far from resolved. Ominously, Mr. Trump views the talks with Europe as much more difficult than what he went through with China and in that sense he might be right -- US exports three times more to Europe than it does to China and so has a lot more at stake should the dispute get out of hand.

Macro view; a slight improvement -- maybe. We see the US economy performing pretty much on trend this year, with 2% GDP growth likely achievable. Once again, it will be the US consumer that will do the heavy lift-ing, as we do not expect business investment to contribute all that much to growth in 2020, especially as we near the US elections at which point another spending “freeze” could set in, just like it did during the summer and fall of 2016. With regard to the elections itself, President Trump’s unexpected win in 2016 turbocharged the commodity group on hopes of increased infrastructure spending and more aggressive business invest-ment. Neither one materialized in any significant fashion. This time around, we do not think a Trump reelec-tion will necessarily trigger the same kind of upside price response in commodities. In fact, prices could even fall slightly were he to win should investors conclude that more trade friction lies ahead. On the other hand, a Democratic victory (depending on which candidate emerges) could possibly boost commodity markets (but not equities) as the feeling could be that the trade temperature with China would be lowered somewhat. All this is, of course, is some ways off, but the US elections will no doubt be the next key inflection point going into the second half of the year.



Source for data: Bloomberg

LME World Stocks (in 000 tons) SHFE Stocks (in 000 MT)

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More broadly, the IMF expects the global economy to stage a modest rebound this year following a 2019 per-formance that was the weakest since the financial crisis. Global GDP is expected to expand by 3.3% this year, up from 2.9% last year, with the Fund citing monetary easing policies and a trade detente as helping. However, the IMF sees the recovery as being “tentative”, especially if trade tensions resurface. “At 3% growth, there is no room for policy mistakes and an urgent need for policymakers to cooperatively de-escalate trade and geo-political tensions,” it said. (We should note that the Fund’s numbers came out before the coronavirus outbreak and so we suspect that these projections will likely be lowered next time around).

We are also seeing a modest improvement in several PMI manufacturing readings in both Europe and Asia of late, although here in the US, the ISM numbers continue to deteriorate, although on the flip side, job growth, consumer spending and housing activity are all pretty strong. Our concern is that this upward blip is going to prove transitory and that the numbers could start deteriorating again by the late spring or early summer, espe-cially if China leads the region in another downward spiral. We should get more color on this scenario over the weeks ahead and depending on what happens with the current coronavirus care.

Brexit should not be the critical issue it was for much of last year. Last week, the Conservative party’s “divorce deal” with the EU passed both the upper and lower parliamentary chambers and now needs a sign-off from the Queen to become law. The EU will shortly sign off on the deal as well, meaning that the UK will formally leave on January 31st. However, the formal nature of relations between the two sides is still up in the air and will be negotiated this year. If no agreement is reached, the EU will treat the UK as any other outsider and so there is considerable pressure on both sides to get things wrapped up this year.

The coronavirus scare and its impact on the markets: Right now, metals are experiencing a rather sharp downturn on account of the recent coronavirus that is sweeping China, with many LME complexes rolling back anywhere from half to pretty much all the gains they cobbled together in the aftermath of the US/Chinese Phase-1 trade deal. The crisis has been made all the more difficult by mass movements of people that takes place during the New Year. Up to 22 million people have had their movements severely curtailed in an effort to control the spread of the virus. Public transport has been suspended in a dozen cities and public gathering spots and tourist attractions have been closed. Chinese officials are delaying the end of the New Year holiday by several days in order to avoid having travelers contribute to the virus spreading. So far, the virus has killed 80 people and infected close to 3,000, although the numbers are thought to be higher than that. For its part, the World Health Organization has declared the new coronavirus as an emergency, but stopped short of de-claring an international epidemic given that most of the people infected reside in China.

On the growth side, estimates we are seeing are calling for Chinese growth to be knocked back by as much as 1% in Q1 if the situation is not brought under control soon. Some economists put the growth hit at 1% for the year as a whole, which could be huge For some context, when the SARS epidemic hit back in 2002/2003, Chi-nese retail sales plunged by more than 50% before recovering and quarterly GDP was set back by about 2%. Despite the current panic, we think that China’s willingness to confront the situation head-on and take extreme steps in controlling the virus (unlike the hands-off way the SARS epidemic was handled) bodes well for control-ling this outbreak. In addition, labs around the world are working on a cure thanks in large part to the fact that China sequenced the virus’s DNA in only seven days and has passed over its findings to relevant laboratories and health institutes. If and when this scare is over, we think metals could recover rather quickly, as positive sentiment about the US/Chinese trade deal -- short-lived as it might prove to be -- reasserts itself.

Low levels of metal stocks on both the LME and in Shang-hai should provide an element of downside support.



In addition, if the more optimistic noises made by President Trump about getting an agreement done with the Europeans are followed up on, we could see further gains set in. But heading into the spring, we expect to see the first cracks emerge in the Phase-1 deal. Indeed the recent coronavirus scare could provide the Chinese authorities a legitimate (and somewhat convenient) excuse to cut back on their purchase commitments, intro-ducing yet another wrinkle into the ongoing talks.

Low inventories should provide some support: While we are not excepting major fireworks to the upside in metals in 2020, we should note that the downside should be somewhat given the low level of existing and projected inventories (See our chart on page 5). Given trade uncertainties and lackluster growth conditions, companies will continue to concentrate their purchases and sales around the spot market, avoiding longer-term contracts that would involve stockpiling metal. We should also note that the supply/demand surpluses we are forecasting for five of the six metals (with nickel being the sole exception) are not that large to either replenish inventories or have a material impact on pressuring prices below the 2019 lows, with aluminum and zinc being possible exceptions.

Backwardation are going to spring up again this year: As mine supply continues to improve, particularly in copper and zinc, we should start to see more forward selling by producers. This in turn could lead to periodic backwardations that in turn would limit spec selling, sell-side hedging or inventory accumulation. Chinese stimulus: Some are saying that Chinese stimulus measures could help metals demand to some ex-tent this year, but just like last year, we doubt this will happen. The Chinese authorities have made it clear that they are not looking to flood the economy with money as they did in years past given high national debt levels. Additionally, introducing more stimulus could work at cross-purposes with other goals the government has, namely lowering pollution, shifting the economy away from industry and towards services and high-tech areas, making housing more affordable (and less of a speculative haven) and reducing risk in the financial system. We therefore see Chinese stimulus spending as being relatively modest, with the policy tool of choice instead being more on the monetary side. As things currently stand, China’s metals sector is doing quite well anyway. Recent numbers released last week show that overall nonferrous metal output stood at a record 5.11 million tons last year, with copper, lead and zinc production up by 10.2%, 14.9% and 9.2% respectively. Aluminum (and alumina) output were both down slightly, but this was attributable more to production issues at some of the large smelters.

EV demand -- still some years off: The EV story remains compelling for the base metals outlook, particularly for copper and nickel, but just like last year, we don’t see EVs making a significant short-term contribution to demand. EV sales are simply are not sizable enough just yet to move the needle and we discuss our views on this topic in our nickel section.

Wild cards: The outlook for this year will be further clouded by two wild cards, these having to do with the ongoing protests in Hong Kong and a very unsettled Mideast region. But for now, we need to get through the Chinese health scare and hope that this is not a “black swan” event that could start another leg lower in terms of Chinese growth. Despite the current turmoil, we are cautiously optimistic that the authorities will get a handle on the situation sooner rather than later.

Our discussion of individual metals commence in the pages that follow and by way of reminder, our 2020 price indications are on our table on page 1. As always, we welcome reader feedback and/or comments. A PDF copy of this report can be e-mailed to readers for ease of review or printing.

Guide to Our Report......Chinese Macro Charts: Page 7LME & Shanghai stock levels: PP. 8-9Copper: Page 10 Premium Charts: Page 13 Aluminum: Page 15Physical Premiums: Page 19 Zinc: Page 20 Lead: Page 23Nickel: Page 26Tin: Page: 31


Key Chinese Macro Indicators

Property Markets Chinese Trade Balance

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Source for Charts: Bloomberg


Source For Charts: Bloomberg


LME & Shanghai Stock Levels


Copper stocks Ali stocks

Nickel stocks Zinc stocks



LME & Shanghai Stock Levels


Edward Meir/Commodity Research Group (“CRG) is an independent consultant to E D & F Man Capital Markets Inc. (“MCM ”) focusing on metals commentary. Neither Edward Meir or CRG have a per-sonal futures trading accounts. The information contained in this material should be construed as market commentary, merely observing economic, political and/or market conditions, and not intended to refer to any particular trading strategy, or specific trade recommendation, promotional element or quality of services provided by MCM Inc. or E D & F Man Derivatives Products Inc. (“MDP”). Trading rang-es given are not a reason to buy, sell or hold any commodity mentioned. MCM and MDP are not responsible for any redistribution of this material by third parties, or any trading decisions taken by persons not intended to view this material. Information contained herein was obtained from sources believed to be reliable but is not guaranteed as to its accuracy. These materials represent the opinions and view-points of the author, and do not necessarily reflect the viewpoints and any trading strategy employed by MCM or MDP. This is not an offer to buy or sell any derivative. The information and data pro-vided is not tradable and is for indication-only purposes. All references to and discussion of OTC products or swaps are made solely on behalf of MDP, a member of the NFA and provisionally registered with the CFTC as a Swap Dealer. MDP’s products are designed only for individuals or firms who qualify under CFTC rules as an ECP and who have been accepted as customers of MDP. The trading of deriva-tives such as futures, options and OTC products or swaps may not be suitable for all investors. Derivative trading involves substantial risk of loss, and you should fully understand those risks prior to trading.

Lead stocks

Tin stocks

SHFE stocks

COMEX Stocks

Copper-- Year in Review. Copper worked gradually higher over the first four months of 2019, hitting an 18-month high of $6608 in April. But it was mostly downhill after that, with values sinking to a two-year low of $5518 in early September. After several weeks of sideways trading following that low, a decent December rally managed to tip the market into a 4% gain for the year as a whole. In both instances when prices rallied -- i.e., in Jan-April of 2019 and again this past December-- the move up was attributable to increased optimism about the US/Chinese trade picture. The early 2019 move followed the Trump-Xi summit in late 2018 in Argentina that resulted in the US agreeing to postpone the levying of 25% in additional US tariffs on Chinese goods, coupled with a notable-about face by the Fed on interest rates. Similarly, the successful wrapping up of a Phase-1 deal last month --and the build-up leading to it -- triggered yet another 10% rally heading into year-end.

So far in the New Year, January has been a particularly volatile month. After hitting a seven-month high of $6343/ton in early January, we are currently in the throes of a sharp virus related selloff that has seen pretty much the entire December/first half January advance get rolled back. In fact, last week’s decline in copper was the worst weekly drop in some 19 months. Despite the current down move and as discussed in our introduc-tion, we see the authorities eventually controlling the outbreak given the extraordinary steps being taken. Were it in not for the US/Chinese trade frictions we saw crop up during 2019, the fundamentals of the copper market actually looked quite constructive for much of 2019 and should have ushered in much higher prices. On the supply side for example, mining companies were (and still are) struggling to keep output aloft. Issues first surfaced at the beginning of 2019 when Codelco said in February that it produced 1.678 million tons of copper at its mines in 2018 (excluding joint venture production), down 3.3% from the previous year and sounded rather downbeat about the outlook going forward. Antofagasta also said it experienced production issues and saw the market in a deficit of between 100,000 and 300,000 tons for 2019 given global shortfalls. Sumitomo joined in sometime later, saying it is projecting its output to fall nearly 8% in 2019.

As the year unfolded, the issues only got worse. In early Q2, we had reports that output fell by 9% on a sequential basis at MMG’s Las Bambas mine in Q1 following unrest there, while Freeport reported an 18% Q1 production decline on account of issues at Grasberg. In May, the ICSG came out to say that it expected 2019 mine supply to remain essentially unchanged, the second lowest rate of growth in six years. In June, the mar-kets had to deal with a more tragic situation, this one having to do with 43 “illegal” miners dying at a copper/cobalt Glencore facility in Congo. All these difficulties were reflected in falling TC/RC charges, which ended the year at close to seven-year lows. (See our charts on page 13). Copper prices had their worst showing in the August/September period, weighed down by trade concerns and a slight easing in supply; on the latter point, Codelco surprised the market in August by saying that it is on track to hit its 1.7 million ton production target this year, despite a 13% y-o-y output decline over the first half of this year.

More broadly, the latest ICSG figures showed that mined output declined by about 0.4% in the first nine months of 2019, with concentrate production remaining essentially unchanged and solvent extraction-electrowinning (SX-EW) declining by 1%: Production in Chile declined by 0.3% and Indonesian output temporarily declined

3-Month Copper Prices

LME Copper Stocks (tons)



Source for chart: Futuresource.com

by 50% as a consequence of transition of the country’s major two mines. On the positive side, production in a number of major copper mine producing countries, including Australia, China, Mexico, Peru and the US all increased.

On the refined side, the ICSG has world refined production remaining essentially unchanged in the first nine months of 2019, with primary production (electrolytic and electrowinning) declining by 0.4% and secondary pro-duction (from scrap) increasing by 1.6%. Total Chilean refined production (including electrowinning) declined by 11% during the first nine months, while Zambian refined output fell by a whopping 35% due to power supply interruptions and related smelter outages. There was also a 22% decline in Indian production on account of the shutdown of Vedanta’s Tuticorin smelter in April.

The only bright spot in the copper production story during 2019 was the growing output coming out of China as smelter expansion and investment ramped up -- somewhat surprising given relatively weak domestic demand.Through 2019, Chinese copper output was up a little over 10%, a very respectable showing. Among individ-ual names, Jiangxi’s refined output clocked in at 749,300 tons in the first half of 2019, up 3.5% from a year earlier and is on track to hit its 2019 target of 1.44 million tons. Chinalco’s 400,000-tpy Ningde smelter and 400,000-tpy Chifeng smelters also made their 2019 debut, as did Guangxi’s 300,000-tpy Nanguo facility. A new 400,000-tonne-per-year smelter by Daye Nonferrous will also come on stream this year.

We suspect that Chinese industry is plowing ahead with smelter expansion in large part because of pressure from regional governments who are keen to maintain growth and employment at all costs. Some of the con-struction may also be on account of the fact that the industry is expecting a demand rebound in Chinese grid spending after it collapsed by a whopping 20% year-on-year during the first six months of 2019. Meanwhile, concentrate purchases rose nearly 11% y-o-y in 2019, making up for the dip in both scrap and cathode imports. Copper cathode imports declined by 6.2% in 2019, but this may be because the scrap coming into China is actually higher purity than what was coming in before and so the need for cathode is not as pressing. While copper mine supply has been under strain for much of 2019, the demand picture has been far easier to analyze. For much of 2019, channel checks conducted by the likes of CRU (and others) all pointed to lacklus-ter conditions, particularly out of China. (Indeed, our demand sector chart below depicts the flattish to slightly lower demand trajectories in key Chinese copper sectors).

In Q3 of 2019, CRU wrote that “spot demand was virtually nonexistent in key markets...and noted that “a wide range of Chinese copper semis and downstream manufacturers have yet to see any sign of improvement in demand”, calling conditions “very disappointing” or “worrying”. Grid spending, as noted earlier, was also quite weak for much of the year. CRU also pointed that “apart from the domestic air conditioning sector that has seen a turnaround in the first half of the year, most other semis and downstream fabricating sectors were struggling. CRU noted that the US market was “one of the few bright spots for demand” for the first half of 2019, but by the second half, things started to weaken in the US as well. For its part, the ICSG has world apparent refined usage growing by a modest 0.3% in the first nine months of 2019, led by 2.8% growth in Chinese apparent usage, but world ex-China usage was seen as declining by 2%.


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Power grid Investment Floor Space SoldAirconditior Production Auto Production


Source: Bloomberg

2020 Supply/Demand Outlook: We tabulate our main supply/demand projections for the refined copper mar-ket in the table on the following page where we show global consumption growing by 2% in 2020. This is about in line with Chinese consumption growth of 2.2%, effectively double the 1.1% growth we saw in 2019. (Note that through October of 2019, Chinese consumption, as per the ICSG numbers has been basically flat, at about +.45% and so we are assuming a slight uptick going into year-end 2019).

We have mine production as basically flat for last year, while refined output increased by 3.14%, pulled higher in large part by the 7.5% increase in Chinese refined production. (The government posted a 10.2% increase in refined output last year, but we are slightly under that as per the WBMS numbers). This year, we see mine sup-ply expanding by 1.66% and an easier mine supply picture should enable concentrates to flow more freely. (In fact, we are already starting to see an increase in TC/RC charges following 2019’s extraordinarily low levels). We see refined production rising by a little over 3%, while Chinese output should increase by 6%. In terms of ending balances, we see a slight deficit in 2019 (-140,000 tons), followed by a minor surplus in 2020 (of 120,000 tons) and so there really will not be much movement in overall stock levels over this two-year period.

The latest ICSG outlook has 2020 global production reaching 25.3 million tons, up 4.2% over last year. The ICSG bases its increase in part on aggressive smelter capacity expansion in China, supply improvements in Africa and a return to full capacity at several other smelters and refineries. In Africa, despite a number of mine setbacks and miner/government disputes, the ICSG expects a 4% rebound in refined output in 2020. In China, BGRIMM Lilan Consulting group sees Chinese cathode production increasing by 6% this year as a total of 900,000 tons of additional copper cathode production capacity comes online thanks to six new projects. For its part, the IWCC expects 2020 global mine production to increase by 1.7% year-on-year to 23.63 million tons.

On the demand side, the ICSG has global apparent usage of refined copper growing by 1.7% to 25 million tons in 2020 and sees a surplus of 281,000 tons for this year compared with an estimated deficit of 320,000 tons in 2019. Industry group IWCC does not see Chinese copper demand growing at all this year and expects demand to remain at the 2019 level of 12.09 million tons. The Council see global demand increasing by 1.2% in 2020 to 24.2 million tons, against 24.19 million tons of refined production, leaving the market in a rough balance.

CRU projects global refined consumption rising by 1.4% in 2020, up slightly from the 1% it projected for 2019, It sees Chinese demand rising by 1.8% this year doubling from the .9% projected for this year. CRU assumes China’s grid spending will recover slightly in 2020 (by 2%) following 2019’s disastrous showing, but is not entirely convinced that it will. Despite soft demand readings, limited mine supply should keep the market rel-atively balanced. Mine output growth is seen up by a meager .3% in part because CRU has mine disruptions running at relatively high levels this year (at around 5%). As a result, it sees refined output rebounding this year by about 1.3%, but not really overwhelming the market. Despite tight mine supply, CRU is calling for a refined copper surplus of around 100,000 tons in both 2019 and 2020.

New demand sources for copper from electric cars and associated charging stations are touted as potential sources of fresh demand for copper, but the red metal will not benefit much from this trend over the short-term. UBS projected last year that if all consumers shifted to Chevy Volts effective immediately, copper demand would rise by 22% – a fairly modest increase compared to a 30-fold increase in lithium, a 20-fold increase in cobalt and a doubling in nickel consumption. CRU sees copper demand related to EV demand rising by about 300,000-500,000 tons by 2023/24 and to 3-4 million tons by 2028-2032. It sees another 500,000 tons of incre-mental copper demand coming from charging stations, but only by 2040 from 40,000 tons right now. Of course, the bulk of EV demand is still years down the road and is not a straight shot higher either as this year’s sales decline in a number of emerging markets illustrated.

2020 Price Indications: Although copper’s fundamentals are relatively constructive, there are some key exog-enous variables that will arguably have more of an impact on prices going forward. For the moment, the cor-onavirus scare is pulling prices lower, but as we wrote in our introduction, we think the slide will prove to be exaggerated, especially if the authorities manage to ring-fence the contagion, as we suspect they will. But looking beyond the virus, given our generally subdued view of the global macro economy going into 2020 and expectations that the current US/China trade deal will eventually flounder, we are not expecting much in the way of upside fireworks. Conversely, thanks to relatively tight supply, characterized by flattish mine produc-tion and low stocks, we do not expect to breach the 2019 low of $5518 either. We see prices ranging between $5518-6560 this year and call for an average of $6090 for 2020 as a whole.



In terms of other numbers out there, CRU expects prices to average $5,950/tons in 2020. Wood-Mac is more bullish, projecting an average of $6600 for next year. It sees mine supply somewhat strained going into the last few months of this year, partly on account of the fact that the Chilean disruptions have yet to be fully fac-tored in. Next year, it expects to see Chinese grid spending pick up, as it believes that unspent 2019 allo-cations should get front-loaded into 2020. However, Wood-Mac points out that its forecast is predicated on fundamentals alone and does not take into account any adverse change in sentiment, such as a marked dete-rioration in the macro or trade picture. In late October (and well before the recent rally) Goldman Sachs put out a medium-term 6-month bullish call on copper at $6,500 per ton. JP Morgan went the other way, cutting its 2020 average price forecast from $5,400 to $5,050 for next year. Finally, the latest Reuters poll (from October) has a mean average copper price of $6050 in 2020 (basis cash) and has the market in a 191,000 ton deficit next year following a 75,000 ton shortfall in 2019. We should note that all these forecasts were put out before the recent virus scare.


YTD2014 2015 2016 2017 2018 to Oct 2019 2019E 2020E

Consumption 22,750 22,903 23,183 23,334 23,925 19,610 24,010 24,500Yr-Over-Yr Ch 7.65% 0.67% 1.22% 0.65% 2.53% -1.03% 0.36% 2.04%

China Consumption 11,303 11,353 11,642 11,790 12,482 10,264 12,620 12,900Yr-Over-Yr Ch 14.98% 0.45% 2.55% 1.27% 5.87% 0.45% 1.10% 2.22%

Mine Production 18,625 19,377 20,370 20,116 20,331 16,981 20,450 20,790Yr-Over-Yr Ch 2.81% 4.04% 5.13% -1.25% 1.07% 1.43% 0.59% 1.66%

Refined Production* 22,463 23,033 23,233 23,481 23,665 19,424 23,870 24,620Yr-Over-Yr Ch 7.21% 2.54% 0.87% 1.06% 0.78% -0.75% 0.87% 3.14%

China Refined Prod. 7,649 7,964 8,436 8,889 8,949 7,584 9,620 10,200Yr-Over-Yr Ch 14.73% 4.11% 5.94% 5.37% 0.67% 3.28% 7.49% 6.03%

Apparent Balance -287 130 50 147 -260 -187 -140 120

Total Stocks** 768 926 971 971 772 852 752 650Of Which Held By..Producers 316 299 295 293 292 286Merchants 17 16 18 18 15 13Consumers 127 128 121 117 114 121Exchange 308 483 538 543 351 431Weeks Use 1.76 2.10 2.18 2.16 1.68 1.88 1.6 1.4

* Includes Secondary** Does not include govt stockpilesSource: WBMS/ICSG / F: ForecastE: ED&F Man Estimate

Refined Copper Supply/Demand Annual Balance (000 MT)

000 MTChinese Imports of Copper Cathodes and ScrapChina Imports of Copper Ores

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Although the Chi-nese are importing much less copper scrap, they are making up for that by maintaining relatively high cop-per content.



Source for Charts; Bloomberg

Copper Dynamics

China Copper Demand Chinese Copper Demand -Air conditioning

Chinese Copper demand - Car Global Copper TC/RC

Copper – Shanghai Premium China Cu Conc Treatment Charges

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* Copper used in Car production (50 lbs/unit)

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Source for Charts: Bloomberg Edward Meir/Commodity Research Group (“CRG) is an independent consultant to E D & F Man Capital Markets Inc. (“MCM ”) focusing on metals commentary. Neither Edward Meir or CRG have a personal futures trading ac-counts. The information contained in this material should be construed as market commentary, merely observing economic, political and/or market conditions, and not intended to refer to any particular trading strategy, or specific trade recommendation, promotional element or quality of services provided by MCM Inc. or E D & F Man Derivatives Products Inc. (“MDP”). Trading ranges given are not a reason to buy, sell or hold any commodity mentioned. MCM and MDP are not responsible for any redistribution of this material by third parties, or any trading decisions taken by persons not intended to view this material. Information contained herein was obtained from sources believed to be reliable but is not guaranteed as to its accuracy. These materials represent the opinions and viewpoints of the author, and do not necessarily reflect the viewpoints and any trading strategy employed by MCM or MDP. This is not an offer to buy or sell any derivative. The information and data provided is not tradable and is for indication-only purposes. All references to and discussion of OTC products or swaps are made solely on behalf of MDP, a member of the NFA and provisionally registered with the CFTC as a Swap Dealer. MDP’s products are designed only for individuals or firms who qualify under CFTC rules as an ECP and who have been accepted as customers of MDP. The trading of derivatives such as futures, options and OTC products or swaps may not be suitable for all investors. Derivative trading involves substantial risk of loss, and you should fully understand those risks prior to trading.

Aluminum-- Year in Review: After closing the last day of 2018 on its yearly lows, aluminum prices regrouped going into the early part of 2019, reinvigorated by improving US/China trade sentiment, reports of Chinese pro-ducer cutbacks (some 800,000 tons announced at year-end) and an about-face by the Fed on rate policy. The January rally stalled going into February, but by March, prices regrouped, reaching a 2019 intraday high of $1951 on the 20th. This move was largely on account of President Trump suspending tariff increases on some $200 billion worth of Chinese goods which in turn triggered a monstrous 6% rally in Chinese equity markets that spilled over into metals. Also helping, was news of a cyber attack on Norsk-Hydro that hindered the com-pany’s output for a period of time. Aluminum production growth also started to slow sharply at that time; the IAI reported that global primary production rose by only .6% year-on-year during the first two months of the year, citing falling Chinese production and exports. Falling inventory trajectories also helped prices firm up; although Shanghai stock holdings ticked higher in Q1, we saw continued declines on both the LME and COMEX.

But by April, aluminum’s fundamentals finally caught up with overextended valuations. Global demand pro-jections were marked lower due in large part to a decelerating global economy. At the time, Hydro said that it saw aluminum global demand rising by as little as 1% in 2019, while Rusal cut its forecast to +3%. Either figure would have represented the slowest rate of growth in demand for at least ten years. On the supply side, Rusal metal started flowing freely by April, as sanctions were lifted, while Chinese semi exports started to ramp up on account of an uptick in Chinese production. The abundance of aluminum scrap was another bearish influence, since its relative abundance in the US (in the absence of Chinese buying) pitted it against primary units, at least in some applications.

By May, prices (and premiums) came under further pressure after the US announced that it was going to remove Section-232 tariffs on Canadian and Mexican aluminum and steel products, although much of the downward move had already gotten underway well before the formal announcement. Separately, alumina prices continued to sell off in May and constituted yet another source of pressure, this after a Brazilian federal court ended a formal embargo on Norsk-Hydro output, enabling the facility to reach 75%-85% utilization fairly quickly. Meanwhile, Chinese aluminum production continued to inch higher, with reported April output up nearly 4% from a year earlier just as semi exports hit yet another record high.

The easier supply picture coincided with a worsening demand (and trade) outlook going into the late spring/early summer months and by June, prices cratered to a 2 1/2 year low of $1745/ton. But despite the weaker tone, there was not much of a supply-side response, at least judging by the latest IAI figures, which showed global primary aluminum output rising again in May on strong Chinese output. A slight easing in production helped prices stabilize by July, but continued concern about the US/Chinese trade spat kept the rally in check, especially after President Trump unexpectedly imposed an additional 10% tariff on $300 billion of Chinese imports in September. Prices continued to work lower heading into the second half of August as the general “trade and macro malaise” that gripped many of the metals over the summer months hit ali as well.


Base Metals Overview 2020 - page15

3-Month Aluminum Prices

LME Aluminum Stocks (tons)


Indeed, CRU came out in August to say that it saw US primary consumption contracting by as much as 3% in 2019, the first decline since 2009, with the extrusion sector being particularly weak. CRU also called for 2019 global demand to rise by an anemic .1%, the slowest in ten years. The rate of Chinese demand growth was slashed to +1.4%.

Although aluminum exchange stocks continued to fall, they were not of much help, as they were perceived to still be high, while reports of massive “shadow” stocks, although not confirmed, were not entirely dispelled either. (Indeed, LME inventories have not done a good job in predicting price patterns for much of last year. The situation was particularly confusing over the fourth quarter of last year, when stocks hit their lows for the year, only for prices to do so as well. Conversely, we saw a substantial 500,000 ton increase in inventories from the November 2019 through to January of 2020, but prices rallied on the increase. We suspect this dis-connect was largely attributable to the fact that these stock movements were taking place largely on account of players positioning their holdings in order to adjust to the new LME warehousing rules designed to get rid of queues (mostly in Asia). We plot inventory movements for ali on our charts on page 7-8).

Ali prices started another leg lower during the second half of September, culminating in a sell-off to a near three-low of $1705/ton on October 4. The deteriorating demand picture was responsible for the decline as CRU revised its 2019 global offtake number to -.3% y/y. Others brought their numbers in as well; Antaike pro-jected that Chinese consumption would fall by 1.2% this year, the first dip in some 30 years. Although Antaike had Chinese production falling in 2019 as well (by 1.6%) the research group pointed out that this drop was not impacting exports all that much. Non-Chinese producers started to react to the grim price backdrop; Norsk Hydro announced a 20% cut at its Slovak smelter in Q4, citing “demanding” market conditions, while Rio Tinto did the same with its Tiwai Point plant in New Zealand. For its part, Alcoa kept 1.5 million of its production portfolio “under review”, but in the absence of serious Chinese cutbacks, none of these moves did much for the market.

But just when things look bleakest, markets have a surprising knack to turn around. In ali’s case, ever since putting in that October 4th low, prices began to rally going into the balance of October and into early Novem-ber. Although much of the gains were rolled back by the second half of November, prices regrouped to push higher through December and into January. But roughly two-thirds of this rally has already been rolled back on account of the coronavirus scare.


2020 Price Indications: Most analysts we heard present at the LME in late October were mostly bearish on the metal going into next year, as the high deficit projections that were quite prevalent at the start of the year for both 2019 and 2020 have pretty much fallen by the wayside, replaced instead by balanced numbers or slight surpluses. In this regard, Harbor and CRU are both forecasting roughly 1 mln ton surpluses for this year; our numbers are not that far off as we note from our table on the next page; we expect back-to-back 2019/2020 surpluses in the order of 1.2 mln and 1.0 mln tons respectively.



On the supply side, we learned from the IAI last week that global aluminum output fell by 1.0% last year in its first annual contraction since the financial crisis in 2009. China’s production of primary aluminium fell by 1.9%, coming in at just under 36 mln tons and a rare reversal. However, the Chinese dip was attributable to the Hongqiao and Xinfa Group both experiencing output issues, something that likely will not reoccur this year. In fact, CRU expects Chinese production to rebound by anywhere between 5%–7% in 2020 as new capacity comes onstream. Indeed, it sees 95% of Chinese smelters operating profitably right now thanks to lower input costs and efficient plants. In addition, regional governments announced plans to restart smelters shut in 2017-2019 due to environmental regulations; with these smelters profitable (and cleaner) as well, the decision to restart output could be an easier sell to the regulators.

We are not as upbeat on Chinese 2020 production prospects as CRU is. While we do see a 3% rebound in Chinese output in 2020, we think a 7% advance is a stretch given the relatively restrained Chinese (and West-ern) demand backdrop that will likely extend into 2020. Moreover, we are not sure that the semis export “safety valve” that has been in place for some time for Chinese producers and which has arguably bailed out a num-ber of them out will be as open as it has been in recent years. European trade officials are becoming increas-ingly troubled by the flood of Chinese semis and billets coming in and other Far-East Asian countries are taking notice as well. With Chinese exports possibly becoming harder to shift, we think this should keep the lid on Chinese production somewhat.

Meanwhile, production outside of China rose by just .2% last year to 26.1 million tons, but here too much of the decline was due to technical issues as opposed to industry downsizing. The 7.3% drop in Latin American production, for example, was largely on account of reduced throughput at Albras to around 50% of capacity. North American capacity increased by a paltry 1%, this despite all the efforts that have gone into tariffs.

On the demand side, while 2020 readings should improve over 2019 levels, they will certainly be nothing to write home about. Antaike, for example, sees Chinese demand up by 1% next year after projecting a 2.1% contraction in 2019. We see global demand rising by 2.6% next year after declining by just over 1% this year. (We base our negative 2019 reading on the fact that the WBMS numbers through October of 2019 year-to-date is already running at -1.42%; see our table). We see Chinese demand growth increasing by 3% in 2020 vs. a .5% contraction in 2019. Alcoa has global demand rising by anywhere between 1.4%-2.4% this year after contracting in 2019.

Alcoa sees a 600k-1 mln ton surplus for this year, but has not commented yet on pricing. Harbor Aluminum sees a 1 million to surplus going into 2020, citing primary expansion plans in the Middle East, India, China, Southeast Asia, Russia and the US, while limited restarts should occur in Brazil and Europe. As of the LME meeting, Harbor expected three-month aluminium prices to average between $1750-$1800 in 2020. Unlike Harbor, Fastmarkets expects a significant supply shortfall in 2019 (roughly 1.875 million tons) and is calling for another more modest 500,000 ton deficit for this year. It expects the ali cash price to average $1763/ton in 2020, strengthening as the year goes on. Analysts at Morgan Stanley are bringing up the rear, warning in a note last month that “supply cuts in excess of one million tons are needed to prevent a drop to our bear case of $1,657 per tonne in early 2020”.

For its part, CRU sees a 1 mln ton surplus for aluminum going into 2020 and sees prices sinking to about $1660 at one point next year and even to a low of $1525 in the event of a US recession (assessed at 40%) before recovering somewhat by year-end. For the year as a whole, it sees an average of $1690. Macquarie sees continued output from China as weighing on prices, noting that total capacity will likely hit almost 50 mil-lion per year even though the government wants to cap capacity at 45-46 million tons. It sees a small surplus for ali this year following a deficit in 2019. Finally, the latest Reuters poll has the LME cash price averaging $1814 in 2020, with a surplus of 304,000 tons expected. We should note that all these forecasts were put out before the recent virus scare.

We see the market ranging between $1680–$1950, with an average price of $1780/ton looking reasonable. We base our view on the fact that the global macro environment will remain somewhat sluggish going into 2020 and although many are calling for better growth compared to 2019, the demand bounce we could get is frankly not going to be enough to move prices significantly higher, especially if the market has to work through a 1 mln ton surplus, lingering trade clouds, US election uncertainties, not to mention the current coronavirus scare that has the potential to generate more short-term weakness.



YTD2014 2015 2016 2017 2018 to Oct 2019 2019E 2020E

Consumption 54,261 57,158 59,604 60,038 62,685 51,410 61,950 63,600Yr-Over-Yr Ch 16.48% 5.34% 4.28% 0.73% 4.41% -1.42% -1.17% 2.66%

China Consumption 28,003 31,068 32,563 31,908 35,521 29,325 35,800 36,350Yr-Over-Yr Ch 27.55% 10.94% 4.81% -2.01% 11.32% 0.69% 0.79% 1.5%

Refined Production 53,908 57,392 59,330 62,381 62,645 51,626 62,950 64,700Yr-Over-Yr Ch 3.47% 6.46% 3.38% 5.14% 0.42% -0.61% 0.49% 2.78%

China Refined Production 28,317 31,518 32,698 35,189 35,802 29,252 35,550 37,250Yr-Over-Yr Ch 6.72% 11.31% 3.74% 7.62% 1.74% -0.82% -0.70% 4.78%

Apparent Balance -353 234 -275 2,343 -40 216 1,000 1,100

Total Stocks 6,428 3,787 2,760 2,302 2,429 1,753 1,823 1,932Of Which Held By..Prodrs/Merchts/Cons. 1,982 555 436 403 478 479Exchange 4,445 3,232 2,324 1,899 1,951 1,274Weeks Use 6.2 3.4 2.4 2.0 2.0 1.5 1.5 1.6

Source: WBMSE: ED&F Man

Primary Aluminium Supply/Demand Annual Balance (000 MT)

With regard to premiums, this past year was a tough one for aluminum producers who were banking on ris-ing premiums to at least compensate them for falling flat prices. The collapse in automotive demand in certain key markets certainly took its toll given that transport accounts for 38%, 31% and 48% of US, European and Japanese aluminum demand respectively. In China, December vehicle sales dropped by 3.4% year-over-year for an 18th consecutive month, while for 2019 as a whole, sales were down 7.4%, posting their second annual decline. Having said that, it is unlikely that the global auto sector will experience the same degree of sales contraction this year.

At the recent Platts conference in Florida, most people we talked to thought that Midwest premiums would not go much lower. For one thing, they told us that costs of getting metal to the US is becoming increasingly less attractive at current levels and the fact that Section 232 tariffs remain in place for a number of countries outside of the US and Canada should prove supportive as well. Moreover, the US still remains a significant importer of ali and has not seen much of a change in its production profile in the post-tariff era. Notwithstand-ing all this, the extent of the recent Midwest premium slide has been surprising and quite sharp, which tells us that further declines cannot be ruled out, especially if current bullish sentiment starts to fade. Moreover, if the 232 tariffs are removed and replaced by quotas, we suspect that this will not be as supportive to premiums. In addition, US producer selling, which was reportedly quite aggressive in December, could resurface again, while the wide-spread availability of scrap -- still plentiful despite recent tightening -- could act as a source of further pressure. We see Midwest premiums getting to a low of somewhere between 12 to 12 1/2 cents (possi-bly by late Q2), while a high print of around 16 cents should cap the upside. (See our premium charts on page 19).



Source for Charts: FM

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Zinc-- Year in Review: Similar to copper and aluminum, zinc had its strongest period of 2019 during the first four months of the year, getting to a 10 month high of $2958/ton on April 2. However, it was pretty much down-hill after that, apart from a short-lived September/October rally that faded by early December. We have recov-ered some ground since the early December low of $2200, but roughly two-thirds of the $260 advance we have seen early December has already been rolled back in just the last week on account of the coronavirus scare. The initial strength we saw in zinc in early 2019 was mainly attributable to exogenous variables that lifted the overall metals group higher, namely, improving US/Chinese trade sentiment following the Argentine summit and an about-face by the Federal Reserve on interest rates. Also constructive, was ongoing depletion in the LME stock picture where holdings finished February at just under 69,000 tons, down by 170,000 tons since the sum-mer of 2018 (a 10-year low). Although increases on SHFE offset this decline in part, it did not fully cover the LME drop. Also helping zinc’s Q1 rally were reports of flooding in Australia that disrupted export operations at the port of Townsville, where 40% of the country’s zinc production is processed. Glencore’s Mount Isa zinc and lead transportation hubs were also affected by floods, while rumors of a Nyrstar bankruptcy further fueled con-cern about processing capability.

By mid-April, the rally stalled as the market could not justify further gains in light of steadily deteriorating fun-damentals. In this regard, concentrate mine supply rose steadily throughout Q1, reflected in rising treatment charges. At one point in Q1, treatment charges were clustered around the $270–$350 range, with even a mid-$400 trade reported. One zinc concentrate trader told Reuters at the time that the TC charges he was see-ing were unprecedented and a “once-in-a-lifetime” phenomenon. However, Chinese smelters started to fill the void left by Nyrstar (and others like Mooresboro) and began processing concentrates, slowly shifting the zinc balance from a projected deficit at the start of the year towards a balance or even a slight surplus. CRU was among the first to sense this shift, calling for the market to tip into a slight surplus by the end of 2019 following a first half 2019 deficit.

While Chinese zinc output was rising over the summer, demand was weakening substantially (exacerbated by Chinese galvanizers holding high inventories). The Chinese automobile market in particular was in the throes of an implosion at this time; long-awaited car tax rebates promised by the government did not materialize in full, discouraging purchases. At one point, May car sales lagged year-ago levels by roughly 12% and the Indian auto market also started heading south over the summer months.

Outside of autos, China’s construction sector fared better and could have saved zinc from a much sharper decline last year. In its latest note, CRU writes that local governments loosened restrictions on real estate transactions in the first half of the year lead to a stronger housing market than expected in the second half. Lat-est data shows that completions and floor space under construction improved in January-November, declining by 4.5% y/y, vs. a much sharper decline of 12.3% from a year earlier. Floor space under construction increased by 8.7%, up from 4.7% a year earlier. Although December real estate investment fell sharply, the sector still had a good year all in all, growing by some 10% in the category and matching 2018’s rate of growth.

3-Month Zinc Prices

LME Zinc Stocks (tons) Source for Chart: Futuresource.com




Meanwhile, Chinese zinc supply, which was held back on account for much of the year on account of smelter outages and environmental restrictions, continued to ramp up and was running at a red-hot 17% above year-ago levels by mid-year. By now, analysts shaved their deficit projections and towards the end of the summer, prices responded accordingly, falling to a three-year low of $2190/ton on September 6th. After stabilizing some-what over the balance of September, zinc pushed higher in October, gaining some $300/ton, but there was lit-tle in the way of news other than some likely short covering and slightly improving sentiment with regard to the US/Chinese trade talks. Not surprisingly, the entire rally was rolled back in November, as bearish fundamentals again asserted themselves, evidenced by steadily improving supply, especially on the concentrate side, where TC’s remained high. Prices mounted yet another upside move in December through mid-January, getting to a two-month high of $2460/ton, moving in sympathy with copper and on rising optimism about the US/Chinese trade talks, but as noted earlier, much of this move has been rolled back over the past week.

2020 Price Indications: The latest ILZSG numbers stand in stark contrast to what the Group was expect-ing at the beginning of 2019. The ILZSG now has the market in a 178,000 ton deficit in 2019 vs. earlier projec-tions calling for close to a 400,000 ton shortfall. Refined demand is forecast to fall by .1% to 13.67 mln tons, but is expected to rise by .9% to 13.8 million tons in 2020. On the supply side, the Group sees 2019 production increasing by 2.2% to 13.49 mln tons, before rising by roughly 500,000 tons (or 3.5%) to 14 mln tons in 2020. The Group expects a surplus of 192,000 tons for the zinc market in 2020.

Fastmarkets sees increased supply coming into 2020 and notes that projects in Gamsberg in South Africa and Century in Australia are due to ramp up next year, boosted by additional capacity from Glencore’s Zhairem mine in Kazakhstan. Output is also set to resume from Penoles’ Capela mine (formerly the Rey Del Plata mine) in Mexico, which closed in 2001. Expansions at Lundin’s Neves Corvo mine in Portugal and Southern Copper’s Buenavista mine on the US-Mexico border should provide an additional 160,000 tpy. Despite decent mine growth, Fastmarkets believes that refining bottlenecks will keep the zinc market in a rough balance this year but as these processing difficulties ease, the market should tip into a surplus going into 2021.

CRU expects 2019 Chinese demand growth of just 1.1%, while ex-China and global production are expected to rise by .8% and 1% respectively. Against an expected production rise of nearly 6% in 2020, CRU sees the mar-ket tipping into a comfortable 2020 surplus of 318,000 tons, although it does see a Q1 2020 deficit before the rest of the year turns easier. In North America, CRU sees refined demand remaining flat y/y, dragged lower by automotive demand, while construction-related activity should be more supportive. Total galvanized sheet pro-duction is expected to decline approximately by 4.2%, while demand from the brass sector should return to only marginal growth of .7% next year. Canadian zinc demand is expected to decline by 2.0% in 2020, with gal-vanized sheet production off by 3.7%. CRU notes that “Mexican refined consumption is forecast to grow 0.9% in 2020 due in part to an increase in galvanized sheet capacity” and adds that the country is “expected to be the main area of refined demand growth in the region”. On the North American supply side, CRU estimates that North American output should rise by 160,000 tons thanks to contributions from a restart at AZR’s Mooresboro, Peñoles’ Torreon’s ramp-up and a recovery at Teck’s Trail smelter that affected Q4 production.

In its latest report, CRU also writes: “Still-high concentrate treatment charges reflect the abundance of raw materials availability and improved smelter profitability should incentivise higher utilisation rates. We believe that there is insufficient smelter capacity to treat all available concentrates but, even so, the outlook for demand is less positive and we therefore believe that refined metal surpluses will begin to build alongside concentrate surpluses, putting downward pressure on prices”. CRU sees an average of $2180 average for zinc in 2020.

As an aside, we would disagree with the CRU and FM assessment of refining bottlenecks impeding supply and would suggest that as long as high treatment charges stay in place, the pressure will be on smelters to ramp-up (or fix) their operations as soon as practically possible. Regional governments in China might also relax their grip on limiting output based on environmental considerations, keen to keep people employed in a slowing economy. If we are correct, refined supply should increase this year, just as treatment charges begin to fade as miners have more choice as to where to go.

In terms of other forecasts, Capital Economics expects the global market to be in 200,000 ton surplus in 2020 compared to a projected deficit for this year. It sees prices rising to $2400 in 2020 (we already got there), but sees a lower average of $2200 for the year as a whole. For 2021, it sees an average of $2,200-$2,250 prevail-ing.


YTD2014 2015 2016 2017 2018 to Oct 2019 2019E 2020E

Consumption 13,778 13,833 13,905 14,234 13,416 11,602 13,780 14,110Yr-Over-Yr Ch 6.54% 0.40% 0.52% 2.37% -5.75% 5.65% 2.71% 2.39%

China Consumption 6,401 6,448 6,515 6,890 6,179 5,597 6,280 6,485Yr-Over-Yr Ch 7.35% 0.75% 1.04% 5.75% -10.31% 13.83% 1.63% 3.26%

Mine Production 13,556 13,359 12,312 11,887 12,510 11,011 12,750 13,250Yr-Over-Yr Ch -0.75% -1.46% -7.84% -3.45% 5.24% 6.67% 1.92% 3.92%

Refined Production 13,484 13,950 13,812 13,806 13,525 11,517 13,667 14,300Yr-Over-Yr Ch 3.82% 3.46% -0.99% -0.04% -2.04% 2.99% 1.05% 4.63%

China Refined Production 5,807 6,116 6,196 6,144 5,681 5,123 5,950 6,320Yr-Over-Yr Ch 9.99% 5.32% 1.31% -0.84% -7.53% 10.12% 4.73% 6.22%

Apparent Balance -294 117 -93 -428 109 -85 -113 190

Total Stocks 1,192 1,086 1,023 660 542 513 501 666Of Which Held By..Producers 244 251 271 244 217 220Merchants 15 15 15 18 18 17Consumers 158 159 156 156 158 158Exchange 775 662 581 250 149 119Weeks Use 4.5 4.1 3.8 2.4 2.1 1.9 1.9 2.5

Source: WBM/ILZSGE: ED&F Man

Refined Zinc Supply/Demand Annual Balance (000 MT)

Fastmarkets sees zinc cash prices at $2381/ton in 2020. Banks such as Commerzbank, Barclays and Gold-man are each calling for zinc to average $2200, $2314 and $1971 this year, with Goldman being the most bear-ish of the lot. Macquarie is at $2113 for next year. Meanwhile, the latest Reuters poll has prices coming in at $2,315/ton in 2020 and those polled see a 2020 surplus of 158,000 tons, following an expected 2019 shortfall of 50,500 tons. We should note that all these forecasts were put out before the recent virus scare.

We tabulate our supply/demand numbers below, where we come up with a 113,000 ton deficit for this year, fol-lowed by a 190,000 ton surplus for 2020. We see Chinese demand increasing by 3.26% next year. As an aside, we are not sure that the WBMS Jan-Oct Chinese demand reading of nearly 14% growth (see our table below) is correct and we are instead sticking to our more modest 1.63% Chinese demand forecast for 2019. Global consumption is expected to increase by 2.4%, roughly in line with last year, while refined production should exceed that, growing by 4.63%.

We see prices ranging between $2020-$2620 this year, with a 2020 average of $2310 looking reasonable.



Lead-- Year in Review: Lead finished roughly 4% lower last year and curiously did not follow the trajectory of the other metals. Although prices firmed up with the rest of the LME group from January through April, values pushed substantially higher in Q3 just when most other metals were floundering. Lead’s Q1 advance was attrib-utable to the factors cited in our earlier write-up, namely, improving sentiment with respect to the US/Chinese trade talks and a more constructive stance taken by the Fed with regard to interest rates. Prices hit an eight-month high in early February, reacting in part to falling LME stockpiles, most of which took place in January when 35,000 tons left the exchange. It was also around this time that the ILZSG wrapped up its final numbers on 2018, noting that the market was in a deficit of 98,000 tons for the year as a whole.

But by March and extending through mid-May, prices started to level off and started a sharp selloff, dropping some $400/ton during a 2 1/2 month period to a three-year low. The decline was attributable to bearish funda-mentals reasserting themselves, especially with regard to the Chinese automobile market where both Q1 car sales and production dropped sharply. Sluggish E-bike sales were also impacting prices; new battery produc-tion standards took effect in mid-April and although CRU pointed out that there would be no notable impact on E-bike battery demand because of the long transition period (3 to 5 years), the new standards would eventually utilize 5% less lead.

Outside of China, US car sales were running lower during the first half of the year (down by about 3% y-o-y over the first four months of 2019) and in fact, contributed to a nearly a .5% contraction in the US’s Q1 GDP readings. BCI data at the time showed US battery shipments in Q1 falling by a rather substantial 6% year on year as well, while shipments through June were essentially flat.

As Chinese and US demand floundered, Chinese lead output continued to increase, running roughly 9% higher year-over-year in Q1 despite the fact that not all smelters were fully operational. More broadly, the lead market itself was heading into surplus, as the ILZSG’s deficit readings were steadily shrinking.

After a disappointing Q2, prices perked up in early June and mounted a stunning $500/ton rally that lasted through to late October. The move was kick-started by news that Nyrstar was declaring force majeure at its 160,000 ton Port Pirie smelter in Australia in late May. Although the outage subsequently did not prove to be that sizable for a 12 mln ton market, participants nevertheless used the opportunity to go long, especially as the company kept postponing restart dates.

A slight price wobble going into the last week of July proved to be short-lived and the market resumed its climb in August, this time fueled by falling LME lead stocks (now at 10-year lows). Also helpful, was news of a sec-ond temporary closure at the Port Pirie smelter. The company initially said that the closure would be for “sev-eral weeks”, but this was expanded to 12 weeks later. The rally continued through September and into October before prices reversed course and rolled back the entire $400/ton advance --plus some -- in November and going into early December. Talk of rising secondary supply and reports of a Port Pirie restart were prominent variables behind the sell-off, coupled with the realizations that supply was rather comfortable as other smelters stepped-up to fill the Port Pirie void.

3-Month Lead Prices

LME Lead Stocks (in tons)




Meanwhile, the ILZSG said that the 2019 supply/demand balance was essentially flat during the Jan-Sep 2019 period, steering expectations away from earlier deficits. There was little to cheer about in any of the lead-ing automobile markets either; although the sharp sales declines we were seeing earlier in the year in China and India seemed to be leveling off, things in Europe were clearly getting worse. In addition US car sales were showing signs of plateauing and were on track to finish the year at a SAAR of 17.1 million units,, down 1.6% from 2018 levels. All these variables came to a head by mid-December, as prices sank to a five-month low of $1865. We have stabilized somewhat since then and moved a little higher going into the early part of 2020, but we rolled back a considerable portion of those gains this past week. Still, lead has not rallied all that much in the first place over the past month and so prices did not sell off as sharply as some of the other metals.

2020 Price Indications: For starters, the latest ILZSG numbers (out last week) projects the refined market to be in a rather substantial 34,600 ton surplus during November. This trimmed the Jan-Nov deficit to 33,000 tons, considerably less than the 82,000 ton deficit the Group calculated for the Jan-Nov 2018 period. The Group has global lead output declining by 0.7% in 2019 mainly as a result of lower output in Argentina, Can-ada, Kazakhstan and Australia (the latter on account of Nyrstar’s Port Pirie troubles). European production fell by 3.5% in 2019 due to lower output at Nyrstar’s French and Dutch plants, while the permanent closure of the 100,000-tonne per year Vladikavkaz smelter in Russia was also a supply loss. However, Chinese production held up very well in 2019, ending the year at 5.8 million tons, up almost 15% year-over-year.

On the demand side, the ILZSG has overall lead demand falling by .5% in 2019. This year, demand is expected to rise by .8% (to 11.90 million tons), leaving the market in a surplus of 55,000 tons. We should note that expectations for a 2020 surplus by the ILZSG (and others) look reasonable given that more zinc output is expected to come on stream. This should theoretically lead to a boost in by-product lead, but as Andy Home at Reuters notes “the long list of pending zinc mine projects is surprisingly light on lead” and cites an ICBC-Standard Bank study out last year that shows zinc mine capacity is well ahead of lead produced as a by-prod-uct. In fact, the latest ILZGS table below indeed captures the relative difficulty lead has had in ramping up on the mine side; the first line in our table shows overall lead mined production trending mostly lower over the past five years, leaving the market reliant on secondary supply. However, we think that mine supply could break the downward trend this year and inch higher by 2%, as our table on page 10 shows.


On the demand side, although we are not looking for the same degree of implosion in the auto sector as what we saw in 2019, especially in the Chinese market (see the improvement in auto sales in our chart below), we certainly are not expecting a “V-shaped” bounce either. The latest December Chinese car sales data shows that production dropped by 3.4% m/m, but the rate of the monthly declines are steadily shrinking. Chinese pas-senger vehicle sales slipped 7.4% from 2018 levels, coming in at 20.7 million units. We see Chinese auto sales growth coming in between a -2%-+2% band next year, not enough to have a material impact on prices, but enough to prevent a revisit to the 2019 lows.


In North America, CRU notes that North American demand will be “a little better next year (+1.6% vs. +1% for 2019)” and notes that “given our higher demand outlook and limited room for local secondaries to respond, the only option to fill the hole left by Belledune’s closure [Glencore’s facility in eastern Canada] is [for the US] to import more lead again, reversing the declining trend seen in US imports in the last two years or so”. CRU also notes that limited growth at Peñoles’ Torreón smelter in northern Mexico and issues at Teck’s Trail should also keep supply tight and help support North American premiums.

CRU adds that European lead demand ended 2019 on a weak note and will likely remain that way going into the early part of 2020. LMC Automotive reports that western European passenger car sales rose in November (+4.2% y/y), but this was against an unusually depressed November of 2018 and is not that upbeat about next year’s auto prospects. Germany’s Automobile Association (VDA) said last month that it expects car sales in Germany to fall by 4% next year and to drop by 2% to 15.3 million in Europe as a whole. It sees US auto sales shrinking by 3% to 16.5 million next year, while sales in China are expected to dip by 2% (arguably a relief to auto producers after what they have been through in 2019).

As our table below shows, we are calling for a 45,000 ton deficit in lead in 2019, to be followed by a 70,000 tons surplus next year. Neither figure is that consequential and should keep overall stock holdings fairly low. The key thing to focus on this year is whether the global auto sector (accounting for 85% of lead demand) will do its bit for the market after it was clearly “missing in action” for much of last year.

The Reuters consensus is calling for average lead prices of $1995 for 2020, with values trading between $1764-$2125. The poll sees a 111,000 ton surplus as well. Macquarie sees an average of $1900 for next year, while CRU is pretty close to that, at $1906. We should note that all these forecasts were put out before the recent virus scare.

Stocks on the LME currently stand at 66,000 tons, their lowest level since 2009, while in China the amount held on the SHFE has slumped by 34,000 tons since the start of January to around 8,800 tons. As a result, we could see a measure of support being provided for lead at least in Q1 and as we wait for them to rebuild. Over the course of 2020, we see lead prices trading at an average of $1920, with a high/low range of $1773-2180.


YTD2014 2015 2016 2017 2018 to Oct 2019 2019E 2020E

Consumption 10,896 10,684 11,262 11,737 11,950 10,375 11,895 12,010Yr-Over-Yr Ch -3.59% -1.94% 5.41% 4.21% 1.81% 6.89% -0.5% 1.0%

China Consumption 4,682 4,380 4,593 4,805 5,235 4,722 5,185 5,250Yr-Over-Yr Ch -4.96% -6.47% 4.88% 4.60% 8.96% 14.04% -1.0% 1.3%

Mine Production 5,273 4,975 4,823 4,488 4,758 4,024 4,790 4,880Yr-Over-Yr Ch -0.47% -5.66% -3.05% -6.95% 6.02% 1.73% 0.7% 1.9%

Refined Production 10,940 10,672 11,128 11,310 11,706 10,094 11,850 12,080Yr-Over-Yr Ch -3.28% -2.45% 4.28% 1.63% 3.50% 5.81% 1.2% 1.9%

China Refined Production 4,740 4,422 4,604 4,726 5,113 4,610 5,430 5,650Yr-Over-Yr Ch -3.95% -6.72% 4.12% 2.66% 8.18% 12.98% 6.2% 4.1%

Apparent Balance 44 -13 -134 -427 -243 -282 -45 70

Total Stocks 560 460 475 425 370 339Of Which Held By..Producers 135 118 113 102 106 110Merchants 0 0 0 0 1 1Consumers 138 137 138 139 140 140Exchange 286 205 224 184 123 109Weeks Use 2.7 2.2 2.2 1.9 1.6 1.4 0.0 0.0


Refined Lead Supply/Demand Annual Balance (000 MT)


Nickel-- Year in Review: : Nickel was by far and away the stand-out in the LME metals group in 2019, gain-ing 32% over the course of the year and soaring to a five-year high of $18,850/ton at one point in September. The first half of 2019, however, was relatively uneventful; prices pushed up from their 2019 low of $10,525/ton posted on January 2nd to an intraday high of $13,565/ton on March 6th before ending Q1 at just under $13,000/ton.

The firmer tone was largely attributable to general metals strengthening, spurred largely by improving US/Chinese trade sentiment and a more constructive stance taken by the Fed on interest rates. In addition, Vale’s tailings dam disaster that took place in late January and early February was also helpful, illustrating just how precarious the state of the Brazilian mining industry was, especially when it came to safely disposing and regulating potentially lethal waste. The scandal was made even worse by the sheer incompetence and corrup-tion involved, typified by the fact that outside inspectors seemed to have known that the dam was unsafe, but nevertheless signed off on safety certificates, eager to protect their consulting arrangements with the company. As we went out to with this note news broke that several Vale executives at the company, including the former CEO, have been indicted by the Brazilian courts on charges of homicide.

The reverberations from the incident made itself felt most acutely in the iron ore market where prices took off on fears of a supply squeeze, but nickel went along for the ride after the government came down hard on Brazilian mining operations in general. However, outside of Brazil, nickel production was running relatively smoothly; both Chinese and Indonesian nickel and NPI output trended higher, with WoodMac saying at the time that it expected production from these two origins to rise some 12% to a record 840,000 tons by year-end. Citing increased NPI supply (especially in China, where production hit a five-year high), Norilsk said that it only saw a 50,000 ton deficit in 2019, the smallest in years, while Macquarie was at 58,000 tons. The INSG came in at similar numbers.

But as output continued to rise during Q2 (apart from the freeze levied on Brazilian production), stainless de-mand side was softening (ex-China), leading to a buildup in inventories and causing nickel prices to roll back roughly half their gains by the end of June. Additionally, premiums for nickel briquettes (6% of usage in the EV sector) also turned south in late Q2, trading near two-year lows. Not helping matters either, was a revival in US/Chinese trade tensions after the progress made earlier in the year floundered.

By June, the price decline levelled off and values started to perk up as flooding in Indonesia’s Sulawesi Island halted operations briefly, while steadily declining LME stocks also provided support. But the real upward move set in over the first two weeks in July when prices soared by a whopping 20% in just two weeks on reports that China’s Tsingshan was buying large quantities of LME nickel to supplement its own output. Once that story came out, fund and spec buying followed. Supply disruptions helped drive prices higher still; reports of flood-ing around Sulawesi, Indonesia persisted into August, just as Vale suspended its nickel processing at its Onça Puma plant in Brazil on court orders. (The company subsequently slashed its nickel production forecast by 10%).

3-month Nickel Prices

LME Nickel Stocks (in tons)




But in retrospect, we think it was the Tsingshan buying that catapulted prices higher, possibly on information the company may have had that the Indonesians were indeed looking to reinstate their nickel ore ban much earlier than suspected. The rally continued into early September, with prices getting to the 2019 $18,850/ton high on the 6th as the Indonesian ban was indeed confirmed, taking effect in December of 2019 and roughly 3 years earlier than expected. In addition, a supply shutdown in Papua New Guinea on account of a waste spill raised fears that the facility could close down altogether, spurring prices higher.

By mid-September, prices ran out of steam, as doubts emerged about the effectiveness of the Indonesian ban. Even the announcement in late October that the ban would take effect immediately did not do much for values, apart from triggering a short-lived intraday rally. By November, the sell-off had gathered considerable momen-tum and by the end of the month, the decline turned into the steepest monthly drop in some eight years. The complex made a halfhearted attempt to rally in December, but never approached the upside momentum that we saw in copper and zinc. By the time we went out with this note in late January, the selling intensified on ac-count of the Chinese coronavirus scare, pushing prices below $13,000/ton, a six-month low.

At the time of nickel’s move higher last summer, we expressed skepticism about the rally for a variety of rea-sons and so we are not surprised to see prices where they are. We wrote at the time that banking on Indone-sian government policy was a risky proposition at best, as decrees could change abruptly. As it turned out, the Indonesian authorities flouted their own ban, allowing more nickel ore to leave the country, a tacit acknowledg-ment that not enough domestic smelting capacity existed. We also warned at the time that even if Indonesia had enough processing capability, nickel would still be coming out, albeit in different forms and so the sup-ply pipeline would not be compromised all that much. The implosion in EV sales was another variable that concerned us; Chinese sales took a nosedive and 2019 sales end the year up by a mere 5% compared to a whopping 70% advance in 2018. Lastly, while Class-1 nickel was tight, there was no shortage of any other type of nickel or nickel by-product, leading credence to the theory that the initial market run-up was suspect.

We also were concerned by the deterioration we were seeing in stainless demand. Apart from relatively decent Chinese offtake, demand was weakening in pretty much all other geographies. US demand, for example, was off a sizable 9% year-over-year by the end of Q2 and Europe also experienced significant slowing. The level-ling off in LME stocks was another bearish factor; in December alone, LME stocks more than doubled in a four-week period to end the year at just over 150,000 tons. CRU suggested that the metal was coming from the same party that loaded-out metal in early Q4 as it could have been facing financing issues. 2020 Nickel Indications: The latest global nickel market deficit estimate provided by the International Nickel Study Group has the market in a 53,373 ton deficit for the January-November 2019 period. The Group has 2019 closing out at around a 47,000 ton deficit, well below the 144,000 tons shortfall seen in 2018. For next year, the Group sees global nickel demand coming in at 2.52 million tons (versus 2.45 million tons in 2019), while supply is expected to increase to 2.48 million (vs. 2.37 million).

There are several variables one needs to look at in the multi-faceted nickel market going into 2020. For start-ers, many are concerned that the Indonesian ban will tighten supply going into next year. We would disagree with this assessment since if the Indonesian actions so far in 2019 are anything to go by, we likely will see more of the same “stop-start” export policy this year as well. As noted earlier, if Indonesian domestic process-ing facilities are not sufficient to treat ore, the government will likely grant waivers to selected companies, al-lowing exports to resume. Moreover, even if ore supply is treated domestically, it will ultimately be exported out as either NPI, ferrochrome, or stainless and so nickel supplies will still be coming out.

Talking about nickel is not complete without addressing the EV sector. McKenzie estimates that global electric car sales (with a plug) will account for 7% of all passenger car sales by 2025, 14% by 2030 and 38% by 2040. (Others are throwing out similar numbers). Vale sees EV-related demand for Class-I nickel units surging to 350,000-500,000 tons by 2025. Germany’s BASF has nickel demand spiking to 318,000 tons in 2025, absorb-ing 58% of global supply. A UBS study projected that if all consumers suddenly shifted to Chevy Volts effective immediately, nickel consumption would effectively double. (Copper demand would rise by 22%, lithium would experience a 30-fold increase, while cobalt use would rise 20-fold). Fastmarkets expects more than 500,000 tons of nickel to be used in lithium-ion batteries in EVs by 2025, compared with 100,000 tons in 2018.



However, the EV sales implosion we saw this year suggests that some caution is warranted with regard to these upbeat projections. Indeed, we have seen that EV demand is not necessarily a straight line up and an-other year or two of sluggish sales could indeed postpone the potential squeeze on nickel supply. We are also wary about governments changing their mind about how fast they want to move on EV’s. Granted, there are ambitious targets out there, with everyone from California to China mandating certain allocations of EV sales by certain dates. But we fear that as the ramifications of job layoffs in the conventional auto sector become clearer, political opposition could form and slow the EV march, which up to now, has been promoted (and mas-sively subsidized) by various governments. In terms of the job fallout, Germany employs 800,000 people in its auto sector. The numbers out of India are even more staggering; roughly 35 million people wok in either the industry or related support industries and we therefore expect some push-back to slow the EV march.

Also worth noting, although nickel is an integral part of the current EV battery technology, there is no guaran-tee that the battery “recipe” will not change in the years ahead. Indeed, many companies are testing new bat-tery configurations that look radically different than what we have right now. In this regard, there are initiatives undertaken by Lamborghini and MIT to power electric cars with no batteries whatsoever. (See this link). BASF is working on a new recipe for electric car batteries which Reuters states “stretches the time between charges ... that could potentially slash in half the amount of nickel used, while increasing the proportion of cheaper and more abundant manganese”. The cobalt-content in these batteries will be 5% with an eventual target to make them cobalt-free as well. Johnson Matthey is developing a high-nickel cathode material which is more cost efficient and stores more energy than current material. Zinc-air batteries -- free of lithium, cobalt and nickel -- have made their debut and have the potential to play a role as well. Finally, this past October, Toyota rolled out a hydrogen-powered car called the Mirai. It has a revamped fuel cell stack that enables the car to travel 30% farther than the previous model, which had a range of 312 miles. Toyota did not say how long the new Mirai will take to charge, but the previous model took 3-5 minutes. (We reference the article here).

Of course, all of these technologies are still far from being commercially viable and have yet to scale. Certain-ly, many of the Chinese-owned Indonesian operations now being set up to take advantage of EV demand are banking on the fact that these new recipes will not get going anytime soon – if ever. But one should not under-estimate the impact of new technology to upend existing ways of doing things, especially if underlying com-modities used in batteries get too expensive or hard to source. In addition, we are not sure investors will be patient enough to “stockpile” long positions in nickel (or any of the other EV metals for that matter) as they wait for EV demand to materialize. As Andy Home at Reuters put it, “The current reality of nickel’s usage profile is that the amount of metal heading to the battery sector is still dwarfed by the tonnage used in making stainless steel. And the stainless steel sector, which has been booming, looks potentially vulnerable to any ... slowdown in manufacturing activity, particularly in China”.

On the flip side, what class-I nickel does have going for it is that the more abundant class-2 nickel is not a vi-able economic substitute at this stage when it comes to the production of EV batteries (and nickel-sulphate in particular). One mining engineer told us during LME week that the “conversion of ferronickel to class 1 nickel through mattes... will be economically viable and will create value if the equation of the cobalt price, the nickel sulphate premium, and the sulphur price is positive” implying that if prices get too out of hand for Class-1, fer-ronickel could play a role. The jury is out on pig iron as a substitute; our contact tells us that despite the low cost of NPI “reagent consumption will be much higher [if NPI is used] and the cobalt will be mixed with many impurities which can compromise its recovery and will complicate economic viability”. For now, Class-1 seems to be the metal of choice in nickel sulfate production, although substitution or technical innovation cannot be ruled out in the interim.

Finally, another issue the press has not addressed much this past year is the fact that there is quite a bit of nickel trade -- and friction -- between China and Indonesia, courtesy of Tsingshan becoming a prominent exporter into China. China itself has local domestic PI and stainless production to protect and was not pleased when the Indonesians abruptly curtailed exports of nickel ores. In the past, the authorities in Beijing have levied tariffs on Indonesian finished products (like stainless) and we would not be surprised to see a ratcheting up of tariffs, especially if Indonesian exports continue to arrive. Under such a scenario, the bullish outlook for nickel could darken quickly. We should also note that the two sides are also butting heads over islands in the South Pacific that China is seeking to develop and so the bilateral relationship is an uneasy one in more ways than one.



https://www.cnn.com/2019/11/05/cars/lamborghini-supercar-electric-supercapacitor/index.html

ttps://www.cnn.com/2019/10/11/business/toyota-mirai-hydrogen-fuel-cell-car/index.html


YTD2014 2015 2016 2017 2018 to Oct 2019 2019E 2020E

Consumption 1,590 1,736 1,865 2,104 2,346 2,012 2,425 2,515Yr-Over-Yr Ch 11.79% 9.17% 7.41% 12.86% 11.48% 1.94% 3.37% 3.71%

China Consumption 654 843 898 982 1,096 1,074 1,220 1310Yr-Over-Yr Ch -28.00% 28.90% 6.47% 9.40% 11.65% 17.63% 11.27% 7.4%

Mine Production 2,061 2,134 1,963 2,169 2,379 2,092 2,450 2,550Yr-Over-Yr Ch -19.00% 3.53% -7.98% 10.46% 9.71% 6.27% 2.97% 4.08%

Refined Production 1,836 1,842 1,845 2,064 2,243 1,972 2,380 2,475Yr-Over-Yr Ch -7.50% 0.36% 0.14% 11.89% 8.68% 6.85% 6.10% 3.99%

China Refined Production 537 453 437 621 733 696 810 880Yr-Over-Yr Ch -24.00% -15.62% -3.58% 42.11% 18.03% 14.51% 10.52% 8.64%

Apparent Balance 246 106 -20 -40 -103 -40 -45 -40

Total Stocks 446 446 511 491 433 142 395 365Of Which Held By..Merchants/Consumers 31 31 25 25 22 37Exchange 415 415 487 466 411 105Weeks Use 14.6 13.3 14.3 12.1 9.6 3.0 8.5 7.5


Refined Nickel Supply/Demand Annual Balance (000 MT)

JP Morgan sees stainless steel production (ex-China) struggling again this year after falling by nearly 7% in 2019, the sharpest decline since 2009. Although Chinese stainless production grew by nearly 13% in 2019, JP Morgan warns that this is far ahead of where local demand is and sees this as being “unsustainable”. It there-fore expects Chinese mills to start curtailing stainless production for 2020, bearish for nickel demand and the key reason behind the bank’s “fair-value” $12,000-$13,000 call for nickel going into 2020. CRU sees prices at $15,520 this year, while Fastmarkets is at $16,125, while expecting a 48,000 ton deficit. For its part, the Reu-ters poll expects prices to average $16,500 a ton this year, calling for a market deficit of 30,000 tons as well. Again, all these numbers were out before the recent corona virus scare.

We have 2019 ending with a 45,000 ton deficit and are looking for a similar 40,000 ton deficit in 2020. We see prices trading between $11,300-$16,600 this year, with an average price of $13,900/ton looking reasonable.

9Source for data: INSG, WBMS, Wood Mackenzie



6Source for chart: Bloomberg

8

Global EV sales set to exceed ICE sales by 2036 (million units)

Source for data: Morgan Stanley (MS)


Tin-- Year in Review: The year started off on a strong note for tin, with prices rising roughly 10% through early April and getting to a three-year, intraday high of $21,800. In addition to general metal strengthening observed at the time, tin also benefited from reports that LME stocks sank to just 1,505 tons by year-end 2018. Also helping, were the big dips seen in Indonesian tin exports; Jan-Feb of 2019 exports were running at about 17% lower over year-ago levels and there were 50% swings from month to month.

By March and April, the rally began to run out of steam; Indonesia’s refined tin exports rose by 5% in March and China’s refined tin exports also perked up, rising 187% month-on-month and 102% year-on-year. Although Chinese sales were relatively small, they still were an indication that domestic demand was not strong enough to sop up the extra units. Prices were also responding to a significant slowdown in semi-conductor equipment demand; sales through Q1 were down almost down 10% year-over-year versus a 15.6% increase seen in 2018.

By the end of May, prices sank to the mid-$18,000/ton mark, roughly a six-month low. Once again, a pickup in Indonesian sales weighed on the market after exports in April rose 43% year-on-year to nearly 6,000 tons. Meanwhile, Minsur’s San Rafael tin mine experienced a short-lived labor strike in late April/early May, but the action was not enough of a disruption to get any rally going and neither did reported output declines from Myanmar and Bolivia’s only smelter, Vinto.

Prices stabilized over the course of June only for values to resume their decline going into July and August. In fact, we saw a “flash-crash” in the market on the 3rd of July, with tin losing approximately $1400 a ton in just one session. There was no particular news behind the sell-off, but our friends at the International Tin Associa-tion told us at the time that the market may have been unnerved by the growing trade feud between Japan and South Korea. Meanwhile, Indonesia’s refined tin exports rose 36% y-o-y to 7,621 tons in June and were also up 13% on a m-o-m basis, further pressuring values.

Things only got worse after that, as prices crashed to a three-year low of $15,565 on August 27th shortly after the Semiconductor Industry Association announced that worldwide sales fell by a whopping 16.8% in June of 2019 vs. a year ago, a sixth straight monthly contraction. Despite all this, markets sensed that the decline was overdone and we did see a measure of stabilization set in over in September that saw prices near $18,000/ton before fading slightly into October. News that Chinese producers vowed to cut back on output helped the steadier tone. The balance of Q4 ushered in a quieter trading range, but the damage from the earlier selloff was done. By the end of 2019, tin had the distinction of being the worst performing metal in the LME group for 2019, down nearly 12%. This year has gotten off to a stronger start, but like all the other metals, the gains have pretty much evaporated in the wake of the Chinese coronavirus scare.

2020 Tin Price Indications: Tin’s outlook remain somewhat guarded heading into 2020. In its October 2019 report, the ITA cut its expected global market deficit for next year on account of expected production increases coming out of China and Indonesia. Although the Chinese were supposed to take roughly 20,000-30,000 tons off the market last year, we suspect this amount will just as easily come back on line if prices improve although any aggressive ramp-up will be tempered by restrained supply coming out of Myanmar.

3-month Tin Prices

LME Tin Stocks (tons)




In Indonesia’s case, final 2019 export numbers came in last week in, clocking in at just under 67,700 tons for the year as a whole, about 12% lower than 2018 levels. Although PT Timah was supposed to cut back on its own production last year, its overall output did not suffer much as it acquired several struggling private com-panies and so the company’s combined output remained fairly high. We expect a slightly higher level of sales and exports from the country this year.

On the demand side, semiconductor demand is expected to recover after a very difficult 2019, with industry association figures projecting a rebound of 5.9% in 2020 following an expected contraction of 12.8% last year. Having said that, we are not even sure how much this extra demand will help tin given the continued miniatur-ization of key components. PCBs and tin chemicals demand are both expected to grow in 2020, although the ITA notes that the “poor state of the automotive industry is a source of concern, particularly for smaller Euro-pean producers”. Of course, tin could be another primary beneficiary of the EV boom; one ITA study we saw some time ago noted that EV demand could sop up some 60,000 tons of tin metal by 2030. However, for the moment, the rush to accumulate “battery metals” and bid up their price seems to be on hold given that the bulk of demand is not expected to materialize over the short-term. (See our nickel section).

We tabulate the latest ITA supply/demand numbers below. The Association sees the 2020 balance coming in at an 1,800 ton surplus, not a particularly significant number in a 350,000 ton market. It has global consump-tion expanding by nearly 2% in 2020, largely on account of an expected rebound in Chinese and global tin offtake, this coming after a sharp slide in 2019. Supply is expected to increase by 2.3% to 348,000 thanks to modest rebounds in both Indonesian and Chinese output, leaving the ITA somewhat “neutral” on prices going into 2020.

The Reuters consensus forecast for next year is $17,993, along with a projected deficit of 7,000 tons. Fast-markets is considerably more optimistic on price, calling for a cash average of $19,200 for next year, while Macquarie is at $21,375. These forecasts were out before the coronavirus scare.

We see tin ranging between $15,425-$18,800 during 2020, with an average level of $16,800 looking reason-able.


('000 tonnes)2015 2016 2017 2018 2019f 2020f Y-Y CH 2019/20

World Refined Production 335.9 339.9 365.1 358.0 339.9 347.7 2.31%World Refined Consumption 340.8 348.7 362.6 372.0 339.2 346.0 1.99%Global Market Balance -4.9 -8.8 2.5 -14.0 0.7 1.8

Source: ITA

World Supply/Demand Balances in Refined Tin


lme 2020 market insights - edfmancapital.com · lme 2020 market insights written by edward meir –...

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