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Industrial metals have been stuck in structural surplus to a greater or lesser degree since 2007/08, created by the one of the strongest-ever periods of supply growth. In 2014, aluminium, lead could move into deficit,..

13 Jan 2014

LONDON (Commodity Online): Industrial metals are set to gain strength in 2014 on improving demand and slower supply growth but a stronger US dollar, reduced monetary stimulus and the fragility of the global economic recovery could also create headwinds, according to Barclays Research.

Barclays pointed out that 2014 may mark the end of one of the strongest ever periods for base metals supply growth, while leading manufacturing indicators are signallaing stronger consumption. " For the first time in several years, the balance of risks is shifting to the upside. "Subsequently, we favour buying the dips, especially given the higher prices we expect over the next couple of years," Barclays said.

Industrial metals have been stuck in structural surplus to a greater or lesser degree since 2007/08, created by the one of the strongest-ever periods of supply growth. In 2014, aluminium, lead could move into deficit, surpluses in nickel and zinc set to shrink.

A combination of production cuts (aluminium and nickel), declining output from established mines (zinc) and a slowdown in investment (copper) means that supply growth has either already peaked or will do so at some point in 2014. Total base metals supply growth is already showing signs of flattening, and we expect growth to begin to trend lower through 2014, marking a turning point in supply fundamentals.

Planned aluminium production cuts have soared since the announcement of the new LME warehousing policy, which will eventually reduce smelter profits via lower physical premiums. Production cuts ex-China have totalled close to 2.4Mty of capacity since the beginning of 2012, leading to a sharp change in the market balance from surplus to deficit. The nickel market has also had some production cuts but we think there will be even more once the Indonesian ore export ban is implemented. NPI, which has been the fastest-growing source of nickel supply for a number of years, could start to contract in H2 14 if the ban is fully enforced. If it is not, then with close to 50% of the mining industry ex-China losing money, more nickel mines will likely be shut in.

"In platinum, we believe that the focus will shift to whether auto-catalyst demand improves. Our auto analysts look for vehicle production to recover at a modest rate but the implementation of Euro VI should aid the recovery. In turn, prices should again find better downside support but are unlikely to rally sharply. Similarly, the palladium market should continue to find support from the gasoline auto market, given continued robust growth, as the focus starts to shift away from the size of Russian state stock shipments." 

The zinc market faces the beginning of a structural regression in production from established mines in 2014 and, in our view, it will mark a turning point when supply growth will start to slow and consistently fall below consumption growth. In the short-term, new supply will offset losses from attrition; however, there is now little slack, should new mines and expansions not perform. And with zinc prices low, there is little incentive to push for mine life extensions, leaving the balance of risks for supply to the downside,Barclays said.

Strategies
-Go long in nickel in early 2014, it is undervalued considering the disruption to supply from Indonesian ore export ban.
-Buy copper on dips to the high 6000 given the significant upside potential in 2015.
-Potential for lead, zinc prices to move higher in 12-18 months.
-Platinum Group metals (PGM) will battle higher while gold and silver will be under pressure.
-Platinum and palladium to be in deficit this year too, with supply risks for platinum focused at the start of the year, while palladium faces robust demand and challenging supply. However, sizeable above ground stocks are likely to cap significant potential upside for the PGMs.


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