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Nickel and copper are bull stand-outs in base metals poll

Nickel and copper are the bull stand-outs in the latest Reuters poll of base metals analysts, with both set to rise in price over the next two years thanks to supply constraints and expected market deficits.

All the other base metals are expected to fall in price this year at least, with zinc and lead set to underperform over the next two years as those markets transition from supply shortfall to surplus.

Supply is the clear differentiator in the poll findings.

Demand is widely expected to recover from the synchronised weakness of 2019.

Or at least it was.

The poll was conducted between Jan. 8 and Jan. 20 before the outbreak of the coronavirus in China’s Wuhan started hitting the headlines. It’s still too early for analysts to change their forecasts but quite evidently the hit to Chinese economic activity now looms ever larger.

BUYING INTO DEFICIT STORIES
Nickel was the best-performing base metal last year and analysts are looking for more of the same over the next two years.

The median forecast for cash nickel is $15,325 per tonne this year and $16,500 in 2021, up 10% and 19% respectively on last year’s average price of $13,903.

The bull consensus is almost unanimous with only JP Morgan expecting lower average prices in both years and then only by a small margin.

Underpinning the positive price outlook is Indonesia’s ban on exports of nickel ore, which kicked in at the start of this month and which is widely expected to feed through to lower nickel pig iron production in China.

There are multiple moving parts to this Indonesian puzzle but there is a clear analysts’ consensus that the nickel market will experience a supply shortfall to the tune of 31,000 tonnes in 2020 and 74,000 tonnes in 2021.

Out of the eight analysts prepared to forecast a nickel market balance only one, the Economist Intelligence Unit, foresees anything other than a deficit market in both years.

Expected supply deficit is also why copper gets the collective thumbs-up.

The median expectation is for a supply shortfall of 160,000 tonnes in 2020 and 17,000 tonnes in 2021 and, as with nickel, there are only a handful of contrarians. Just three out of 13 analysts expect a surplus this year.

The copper price is expected to rise by around 3% per year from 2019 levels to $6,214 this year and $6,393 next year.

ZINC THE UNDERPERFORMER
Among the other base metals, zinc is the least favoured while aluminium and tin lie somewhere in the middle of the bull-bear spectrum with analysts forecasting lower prices this year with some recovery pencilled in for 2021.

The poll’s median forecast for zinc is a fall from an average $2,549 in 2019 to $2,295 this year and $2,299 in 2021.

That’s predicated on an expected 108,000-tonne supply surplus this year and a bigger 185,000-tonne excess in 2021. Only one company, Jefferies, is looking for a deficit in both years to the tune of a relatively modest 26,000 tonnes and 21,000 tonnes respectively.

Tangible signs that zinc has transitioned from a state of supply deficit to surplus were conspicuous by their absence last year. Analysts are evidently expecting that to change going forwards.

Unsurprisingly, the collective bearishness on zinc extends to sister metal lead because of the two metals’ shared mined production profile.

Lead is not expected to fall by nearly as much as zinc but that may be down to the market’s opacity as much as anything else. Only 15 analysts hazarded a price forecast for lead, compared with 23 for zinc, and only four projected a market balance estimate compared with zinc’s eight.

Opacity also continues to plague assessments of the aluminium market. Analysts’ views of market balance this year range from a surplus of 1.1 million tonnes (Morgan Stanley) to a deficit of 1.1 million (Bank of America Merrill Lynch).

The median reading is a surplus of 350,000 tonnes, translating into a median price forecast of $1,775, down 1% on 2019. Only a slight pick-up to $1,830 is expected next year, reflecting market concerns that Chinese production is set to resume its strong uptrend after pausing in 2019.

The tiny tin market was out of favour last year and looks set to remain so again this year with a median forecast the price will drop 6% to $17,500, from last year’s $18,660. A modest bounce is expected next year but only to $18,175.

DEMAND SHOCK
This poll is already starting to look like a rear-view snapshot of the world before the coronavirus.

Analysts’ focus on supply differentiators was in part based on a collective assumption that industrial metals demand was going to improve this year after last year’s weak performance.

That benign view in turn assumed a recovery in China’s giant manufacturing sector, still the most single powerful driver of metals prices.

The spread of the coronavirus and Beijing’s increasingly draconian measures to contain it are already undermining those assumptions.

It’s still too early for analysts to change their price forecasts and the consensus is that any Chinese manufacturing recovery is postponed not cancelled.

If the SARS virus of 2003 is a template, itself questionable, the prognosis is for a sharp short-term hit to Chinese economic growth followed by an equally sharp bounce as Beijing pulls all the usual stimulus levers to compensate.

Expectations are changing in real time in tandem with the news flow coming out of China.

However, it’s noticeable that the two base metals hardest hit so far are nickel and copper, down by 12% and 9% respectively since the start of January.

That’s because funds had been long of both, buying into the same optimistic narrative evident in the analysts poll. Those positions are now being rapidly unwound as investors reassess their views.

It’s a sign that demand not supply may yet exert the more powerful effect on pricing this year.

In which case 2020 could end up a lot like 2019.
Source: Reuters (Editing by Susan Fenton)

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