JANUARY 20,2012
SPECIAL ISSUE The Diapason Capital Markets Report
Key economic data this week Chart of the Week: China real estate FAI stays soft
• Dec housing starts lower than expected
• Dec industrial production rose 0.4%
• Jan Michigan consumer confidence jumps
• Jan Empire manu index highest since April
• Philadelphia Fed index rose slightly in Jan
• Jan NAHB Housing index highest since 2007
• U.S. trade deficit widens sharply in Oct
• Initial jobless claims plummet last week
2012 Base Metals Outlook: a rocky ride in H1, but much better in H2
• There is a disconnect between what the market is pricing in for raw industrial materials and our view for a U.S. and China
recovery to develop in the early part of 2012, at least. That means we see upside risk to the base metals prices early in
the year if Chinese policy continues to shift from inflation fighting to pro-growth and the U.S. economy's solid inroads in
manufacturing will be sustained in early part of H1.
• At a global level, the worst of the decline in global manufacturing momentum may be over. The global PMI has already
taken off, with the global composite PMI back well above the 50 break-even level as of last month, and the regional PMIs
are converging higher. The main risks to base metals prices, in our view then, may come in Q2 when we expect a euro-
zone contraction to reach it's nadir. But we believe that its impact on commodity prices will be limited and brief.
• Major central banks around the globe are itching to embark on further quantitative easing after two years of
"unacceptable" slow growth and are just looking for an excuse to do it. A eurozone contraction may just be the thing
they are looking for. New injection of liquidity may likely flow again into riskier assets like commodities and equities.
For important Disclaimers and Disclosures, please refer to the last two pages of this publication
JANUARY 20,2012 SPECIAL ISSUE
SPECIAL ISSUE
The Diapason Capital Markets Report
2012 Base Metals outlook: rocky ride in H1, much better H2
A repricing of the base metals takes place at a time when production costs are ramping up
By Robert Balan and Marion Megel The wild card is the Eurozone sovereign debt crisis
There is somewhat of a disconnect between what the market is pricing in for The wildest of the wild cards confronting base metals in the
raw industrial materials and our view for a U.S. and China recovery to develop in near-future is of course the Eurozone sovereign debt crisis.
the early part of 2012, at least. That means we see upside risk to the base met- Nonetheless, we are optimistic for a resolution to the European
als prices early in the year if Chinese policy continues to shift from inflation situation -- European policy makers are taking steps towards
fighting to pro-growth and the U.S. economy's solid inroads in manufacturing creating the building blocks needed for a sustainable solution.
will be sustained in early part of H1 (both of which we expect, see "Outlook for The other EU risk is of course lower, even possibly negative,
base metals has stabilized: price gains to follow?", Diapason Capital markets Re- growth engendered by even tighter fiscal policy being taken by
port, January 11, 2011). This is also specially true if our view of H1 2012 global EU governments. However, the risks of a severe financial crisis
GDP growth does tally in at the 3.2% level. appear to have decreased -- this development largely driven
the ECB's provision of long-term liquidity through the 3yr LTRO
At a global level, the worst of the decline in global manufacturing momentum
on December 21, with further operation scheduled for February
may be over. The global PMI has already taken off, with the global composite
20. Hence, we expect only a mild growth contraction in the eu-
PMI back well above the 50 break-even level as of last month, and the regional
rozone (-0.2% in Q1-Q2). And even that may be mitigated by
PMIs are converging higher (see "Market Outlook & Commodities Sector Alloca-
tions", January 6, 2012). Encouragingly for metals consumption, global manu-
facturing data suggest industrial production is likely to improve in months ahead.
Base metal market was victim of overly pessimistic outlook
Of all the commodities sectors, the outlook for metals demand is highly lever-
aged to the macro economy, so it is understandable that the base metals have
been hit particularly badly as a result of the market's growth and sovereign debt
risk perception in early Q2 and Q3 2011. The market moved quickly to price in a
gloomy macro outlook (with the perma-bears jumping in with calls of a growth
"double-dip"), which so far has not been supported by the economic data.
Indeed, incoming data in Q4 2011 has been almost universally firm, which natu-
rally should lead to a revaluation of raw industrial materials prices. Also adding
to the positive skew of the sector is the recent positive bent in supply and de-
mand outlooks for most of components of the base metals sector. Revaluation
and repricing is currently taking place, with LME copper up 18% since the mid-
dle of December, and the RICI base metals index up 12.8% in the same period.
For important Disclaimers and Disclosures, please refer to the last two pages of this publication 2
JANUARY 20,2012 SPECIAL ISSUE
SPECIAL ISSUE
The Diapason Capital Markets Report
2012 Base Metals outlook: rocky ride in H1, much better H2
growth elsewhere and central bank action which will certainly follow a eurozone and instead driven by surfeit of liquidity provided by central
recession, if it happens (see "It's not all about Europe: it's time to focus on banks and fears of inflationary outcome to all the quantitative
China, U.S., etc", Diapason Capital Markets Report, January 11, 2012). easing being forced into the system. We argued that "central
bank issued liquidity has tended to flow into financial assets
The Chinese negative factor has already been largely taken out of the equation:
rather than into the real economy. Furthermore, commodities
The better-than-expected China GDP report for Q4 (8.9%) out earlier in the
have been a prime target for liquidity-driven demand, even
week confirmed that the world's second largest economy has not slowed as
more so than equity-based assets. And we have seen how this
much as the market expected, and in fact was even higher than our above-
phenomenon has caused sharp volatility in commodity prices in
consensus forecast of 8.6%. This should provide further support to the case for
recent times. For instance, in early 2008, deep central bank
a "soft landing" of the Chinese economy in the coming quarters. We are increas-
rate cuts sent oil prices surging, which then put a clamp on
ing our Q1 2012 forecast of 8.9% to 9.1%.
economic growth, contributing heavily to the steep global re-
The data should, at least at the margin, ease investors' fear about hard landing cession later in the year. As the H2 2008 downturn cut into fun-
risks in China. The economy is clearly on track for soft landing, in our view. We damental demand, commodity prices then slumped, helping to
project that the GDP will bottom during Q4 2011, rise in Q1 2012, slow moder- trigger an economic recovery in early 2009."
ately in Q2, but will resume a growth pickup in H2 2012. This is also in line with
our expectations for U.S. growth trajectory (see "China's Q4 GDP better than ex-
pected: it's implications", Diapason Capital Markets Report, January 19, 2012).
The main risks to base metals may come in Q2 2012
The main risks to base metals prices, in our view then, may come in Q2 when
we expect a eurozone contraction to reach it's nadir. But we believe that its im-
pact on commodity prices will be limited and brief -- major central banks around
the globe are itching to embark on further quantitative easing after two years of
"unacceptable" slow growth and are just looking for an excuse to do it. A euro-
zone contraction may just be the thing they are looking for. Central-bank pro-
vided liquidity has tended to flow into financial assets rather than into the real
economy -- and any further QE by mid-year will likely send riskier asset prices
soaring again (see "Commodities: seeing a replay of the H1 2008 boom in
2012", Diapason Capital Markets Report, December 22, 2011).
In the above report, we described what happens when commodity prices ceased
to be driven primarily by producers' capital expenditure commitments, cost of
debt factors, inventory patterns given expectations of future economic growth,
For important Disclaimers and Disclosures, please refer to the last two pages of this publication 3
JANUARY 20,2012 SPECIAL ISSUE
SPECIAL ISSUE
The Diapason Capital Markets Report
2012 Base Metals outlook: rocky ride in H1, much better H2
Now central banks globally are again in the process of providing a second huge Chinese construction slowdown not a downside risk
dose of liquidity through quantitative easing (albeit in different guises) and the One of the primary concerns among market participants for
opening of other lending pipelines to struggling banks, especially in Europe. Are base metals demand this year lies with the Chinese property
we to expect the same phenomenon again if global growth is to fail, as we ex- market. The government’s efforts to cool house price inflation
pect by mid-year? are having the desired effect as well as slowing activity in the
We believe that will be the case in the later part of 2012 if our fears of a growth sector. Provided this can be managed and that social housing
contraction is seen in Q1-Q2. We put high odds of a slowdown in Q1-Q2, hence, projects continue to be rolled out, we believe that the slow-
provisionally, we expect more overt quantitative easing by central banks by mid- down in metals demand from this sector should be moderate.
year, and subsequent positive impact on asset price for the rest of H2 2012. Copper, aluminium and zinc are all commonly used in construc-
tion and residential construction in particular, with copper and
The primary risk of eurozone to base metal prices
aluminium the most leveraged.
The macro environment is, of course, just one of the price determinants of com-
With slowing of Fixed Asset Investments (FAI) inflow, expect a
modities. And in a world drowning in debt, and with a eurozone struggling to
cope up with demand for liquidity, one way Europe’s ills could affect commodi- moderate slowdown in residential investment (which makes up
ties is via the channel of trade and inventory finance (which holds particular 25% of FAI) and for further 5%-10% decline in housing prices.
prevalence for aluminium). In 2008, the freezing of credit to the industry was a
major contributor to the steep price decline. European banks, particularly French
ones, play a major role in trade finance. Basel III regulations and the need to
deleverage have already caused them to reduce these exposures – a trend exac-
erbated by the recent difficulties in obtaining dollar funding.
Commodities are especially at risk, since most are dollar denominated and many
financing deals are short term, enabling banks to walk away from them more
easily. On the plus side, higher margins are already drawing other banks to the
field, with some US ones taking the opportunity to expand in what is a relatively
low risk, if low margin, business.
At this stage, the major trading houses report little difficulty in getting finance,
but small firms are much more vulnerable. These nuances are not enough to
stop the recent trend towards looser financing conditions, but if the eurozone
situation were to deteriorate further (not our modal scenario), then this trans-
mission channel will play an important role in stopping the recent upward trend
of base metal prices.
For important Disclaimers and Disclosures, please refer to the last two pages of this publication 4
JANUARY 20,2012 SPECIAL ISSUE
SPECIAL ISSUE
The Diapason Capital Markets Report
2012 Base Metals outlook: rocky ride in H1, much better H2
It's worth noting here that most of the base metals consumption in construction 2012 a challenging year for base metal production
is during the final stages (think copper in electric wiring and aluminium in doors/
2012 should be a challenging year for base metals production.
windows and zinc in galvanised steel studs and frames for instance). For this
The coming producers’ quarterly and annual results should de-
reason we believe that the knock-on impact of the failure to meet social housing
scribe a demanding business environment, as costs multiply.
building targets so far is not particularly negative for metals demand this year.
Producers may indeed need to expand drastically their capital
Construction of social housing a priority in 2012 expenditure in order to ramp up production, by developing new
We would also highlight the upside risk that regional governments expedite con- capacities or by extending existing ones. In addition, the impor-
struction of social housing in the run up to the government power hand over tance on environmental and safety rules should also weigh on
later this year or indeed as credit availability improves. The market's base case costs by complicating the production process.
is for real property investment (including both private and social housing) to Globally, miners are also confronted to a growing hostility from
slow to around 17% y/y in 2012 from 23% forecast for 2011. So direct metals governments, accused at best not to participate as much as
demand by the sector as well as indirect demand from the sector should con- they could in the country’s welfare, at worst to plunder the
tinue to grow, but at a slower pace than previous years. The government target country’s resources and exploit the people. In Australia, a tax
is to increase the urbanization ratio by 1% per year in the 12th Five Year Plan, has been implemented on miners, as well as in Latin America
equivalent to 12mn new urban residents per year. countries. In Zimbabwe and South Africa, indigenization laws
Urbanization patterns in China suggests that demand for base metals will con- have been voted, forcing companies to sell the majority of their
tinue to come from this sector for many years to come and will also partly ex- projects to local producers, in the case of Zimbabwe.
plain why the Chinese property market may not necessarily soon undergo the Production costs are ramping up
deleveraging process which the U.S. and Japan property markets are still suffer-
Furthermore, costs to extract the ore and transform it into
ing from. With 50% of the population living in Chinese cities now, urbanization
metal are also mounting rapidly. According to Brook Hunt, an-
will continue to be a driver for urban housing demand in the next two decades.
nual cash costs across the base metals complex have increased
This is in contrast to the US and Japan, whose urbanization rates were already by double-digit CAGRs from 2004 to 2010 (17% as for nickel,
above 75% when their property bubbles burst, and were thus unlikely to provide 15% as for copper, 7% as for aluminium and zinc). These
strong underlying housing demand. Policies to further liberalize the household strong rises can be explained by a myriad of reasons. Firstly,
registration system, provide a better social safety net for migrant workers and the surge in energy prices have been a major source of con-
their children, and develop public housing, will help to speed up the urbanization cerns for many producers as electricity is a primal cost centre:
process in China. Therefore the Chinese property market is unlikely spin out of it represents 40% of the aluminium and zinc cash costs struc-
control as has been the fear of pundits who are making side-by-side compari- tures, 30% as for copper.
sons between the U.S. and China housing market trajectories. We believe the
In China in particular, the largest producer of refined base met-
self-financed nature of the Chinese market does not provide the over-leverage
als, the situation has been particularly severe as the country
conditions which brought down the U.S. and UK property markets.
For important Disclaimers and Disclosures, please refer to the last two pages of this publication 5
JANUARY 20,2012 SPECIAL ISSUE
SPECIAL ISSUE
The Diapason Capital Markets Report
2012 Base Metals outlook: rocky ride in H1, much better H2
has been experiencing strong energy supply issues, leading to a hike in non-
residential energy tariffs effective since December 1st. Secondly, ore grades are
falling, meaning that more ore has to be mined in order to get the same amount
of metal. Thirdly, a worldwide tendency for mining workers to become unionized
(especially in Latin America) has raised labour costs by double-digit rates annu-
ally over the past years.
Rising costs will hit production volumes this year
This rise in production costs may hit production volumes of base metals this
year, as only copper is currently traded far below the marginal cost of produc-
tion (i.e. the production cost of an additional tonne of metal). In theory indeed,
this marginal cost of production acts as an incentive price: over the long run, if a
metal’s price remains close or below the marginal cost of production, neither
new nor existing producers are encouraged to invest in new facilities in an in-
dustry with such high entry barriers. In addition, existing operations become ob-
solete and can shut down, permanently or temporarily. Let’s also note that clos-
ing a facility is always faster than reopening it.
Moreover, every mine and refinery has different production costs. This means
traded on the LME far above production costs, while four major
that even if prices have not yet fallen below the world average marginal cost of
industries have their margins under pressure: aluminium, lead,
production, several producers at the top of the “C1 cash costs curve (i.e. the
nickel and zinc. Aluminium has been the most hit of all base
most expensive operations) can actually deliver negative margins and can thus
metals, as its LME price has stayed below the average marginal
be incentivised to reduce capacity. Let us note that the so-called C1 cash costs
cost of production – estimated at about $2,200/tonne - for sev-
that companies report in their cost curves include only the direct costs
eral months. In November, when the LME 3-month buyer price
(therefore the “costs incurred at each processing stage, from mining through to
was below $2,000/tonne, about half of the world’s smelters
recoverable metal delivered to the market, less the by products credits”, as de-
were delivering negative margins.
fined by Brook Hunt) and so do not take into account several significant costs,
such as the maintenance CAPEX cost, which usually can add another 8-10% to As a result, producers facing tight margins have already started
the firm’s C1 cash costs. to curtail capacity, especially in the aluminium sector. At the
beginning of the month, Alcoa, one of the world’s largest pro-
Recent price declines brought margins to negative
ducers of the grey metal, announced its plan to cut about 12%
It is primarily the recent decline in metals prices that has brought margins into of its worldwide capacities (or as much as 531,000 tonnes), in
negative territory. As said above, copper is currently the only base metal to be an attempt to reduce costs and reinforce competitiveness.
For important Disclaimers and Disclosures, please refer to the last two pages of this publication 6
JANUARY 20,2012 SPECIAL ISSUE
SPECIAL ISSUE
The Diapason Capital Markets Report
2012 Base Metals outlook: rocky ride in H1, much better H2
The race to cut production is on
World Primary Aluminium Production
Other small and large companies have also been looking at curtailing produc- 3'900
tion: Rio Tinto Alcan announced in November the closure of the 175,000-tonne Sources: International Aluminium Institute, Diapason
per annul Lynemouth smelter in the UK. Also, Norsk Hydro should not restart 3'700
idled capacity as its Sunndal smelter. Other cuts have also occurred at smaller
Thousand M etric Tonnes
companies – although less covered by the media –, resulting in a significant de- 3'500
cline in the global production of primary aluminium: from August to November
3'300
2011 (latest data available), it has indeed fallen by 5%, while China’s domestic
output dropped by a strong 8% over the same period. 3'100
The last time the aluminium industry experienced such drastic cuts was in the
2'900
second half of 2008, in the midst of the financial crisis. From August 2008 to
February 2009, global production indeed collapsed by 19%. However, cuts 2'700
started in November and December 2008, while prices hovered between $1,450
and $1,700 a tonne, so at far lower levels than in the current downturn. 2'500
Se 8
Se 9
Se 0
Se 1
J a -0 7
M 08
J a -0 8
M 09
J a -0 9
M 10
J a -1 0
M 11
11
M r- 0 8
N o -0 8
M r- 0 9
N o -0 9
M r- 1 0
N o -1 0
M r- 1 1
N o -1 1
Ju 08
Ju 09
Ju 10
Ju 11
Learning from past mistakes
l-0
l-0
l-1
l-1
n-
n-
n-
n-
v-
-
-
-
-
v
v
v
v
ay
ay
ay
ay
p
p
p
p
a
a
a
a
No
It seems that producers have learned from their past mistakes, as they have
started the cuts in advance, anticipating further tight margins. However, we be- For lead and zinc, there have been no major curtailments so
lieve that production cuts in the aluminium industry should not be as strong as far, mostly due to the fact that the industry is fragmented into
in H2’2008. Indeed, producers may be very cautious this time when deciding a large number of small/medium mining operations that have
further cuts in capacities as shutting operations is a long process and as it has to modest impact on the global picture. In the case of copper,
go through a consultation procedure with union representative (in the case of self-imposed production cuts are not on the agenda as the mar-
Rio Tinto, it took 90 days). In addition, the restarting process is even longer and ket has been experiencing shortages due to strikes, adverse
can take up to six to nine months, explaining why some producers found them- weather and technical problems, leaving the market into wide
selves in an uncompetitive position when the price rebounded in mid-2009. deficits.
Besides aluminium, we can expect additional production cuts for other base met- Varying supply outlook in 2012
als, although to a lesser extent. Indeed, while margins are not currently nega-
tive, prices have come close to the 9th decile of the cost curve (the 10% pro- COPPER: Therefore, the supply picture should vary from one
ducers with the highest cash costs). Regarding nickel, the cutbacks in production metal to another this year, although some challenges should be
have so far been limited to the Chinese nickel pig iron (NPI, a cheaper substitute common (such as tight margins for most metals). Copper
for refined nickel) producers. should continue to exhibit the tightest balance.
For important Disclaimers and Disclosures, please refer to the last two pages of this publication 7
JANUARY 20,2012 SPECIAL ISSUE
SPECIAL ISSUE
The Diapason Capital Markets Report
2012 Base Metals outlook: rocky ride in H1, much better H2
However, despite planning large projects, the world copper production has risen expectation of further price drops. In addition, the shape of the
by an average of 1.5% over the past five years, due to unpredictable disrup- LME forward curve has not encouraged traders to hold cash
tions, explaining why many analysts doubt that 1 million tonnes will effectively and carry positions (in the case of a contango, we buy on the
be added to the market this year. spot market and sell forward at the same moment, keeping the
difference between the two prices as a profit), as the contango
ALUMINIUM: In the case of aluminium, which has been largely developed
has not been steep enough to compensate the storage costs.
above, we believe that production cuts in the world and in China in particular
Therefore, LME inventories are currently at a one-year low.
could narrow the global surplus. We expect production to grow by about 5.5%
globally this year, against 11% in 2011. The Middle Kingdom in particular should On the Shanghai Futures Exchange (SHFE), copper inventories
indeed step up efforts to reduce overcapacity, in an effort to reduce energy con- fell sharply in the last quarter of 2011, to only three days of do-
sumption, since the aluminium industry indeed consumes as much as 6% of mestic consumption, before rebounding strongly in the past six
China’s total electricity consumption. weeks, standing now at 120,452, or about 5.3 days of con-
sumption, a better number but still far away from the 9 days of
ZINC: As for zinc, we expect refined production to grow by about 2%, a much
consumption reached in March 2011.
slower rate than the 5% recorded in 2011. The global refined zinc market should
however not shift into deficit before H2’2013, when the planned shutting of the Huge alum inventories: not available for consumption
Century operations in Australia and the Brunswick in Canada could in fact result
In the case of aluminium, inventories held at the LME are huge
in losses of more than 300,000 tonnes. In the case of lead, we believe that the and even hit a record high in December this year, at 4.98 mil-
Chinese closure and reopening of lead-consuming industries should not reassure lion tonnes. However, much of these stocks are currently not
producers as demand has been therefore quite volatile. However, as the de-
available for immediate consumption and can not therefore
mand potential is strong, we believe that production could grow by 4% this
meet the exigencies of safety stocks (extra stock to mitigate
year, a much lower rate than the 22% growth recorded in the January- the risk of severe production shortfall).
September period compared to the same period in 2010.
The reason why material is locked up in warehouses is that the
NICKEL: Nickel’s production is expected to grow as several projects are coming grey metal has been widely used in financial activities (cash
on stream this year, turning the market into global surplus. However, China and carry positions described above) and has been stockpiled in
should experience further production cuts, especially in NPI. We expect a 9%
massive amounts in specific places such as Detroit in the US,
growth this year globally. where consumers have to queue for months before getting the
Available inventories not enough to cover shortfalls delivery of their material. The same situation has repeated itself
in the Dutch port of Vlissingen recently.
In addition, available inventories might not be sufficient to compensate potential
losses in the production of copper and aluminium. In the case of copper, the As a result, if supply issues materialize in the coming months,
global LME inventories have been declining since the end of September. Indeed, we expect the copper and aluminium markets to be tight,
the falling LME prices have incentivised producers to sell their material quickly in bringing additional support to prices.
For important Disclaimers and Disclosures, please refer to the last two pages of this publication 8
JANUARY 20,2012 SPECIAL ISSUE The Diapason Capital Markets Report
Copper cancelled warrants to the highest since May 2009, provide further support to prices
Marion Megel (marion.megel@diapason-cm.com) Copper LME Cancelled Warrants
Positive data for copper are piling up, helping prices to break the resistance of $8,000/ 90'000
Sources: Diapason, Bloomberg, LME Cancelled Warrants (LHS)
30%
tonne in place since September. After China’s historical figures for imported copper last 80'000 As a % of LME Inventories (RHS)
week, the positive trend has been confirmed this week by a surge in LME cancelled war- 25%
rants, which jumped by 16,800 tonnes on Friday, to 66,025, and represent now 18.5% of 70'000
total LME inventories, the highest rate since May 2009 (chart on the right, top). 60'000 20%
Cancelled warrants are usually a proxy for physical demand: by cancelling a warrant, we 50'000
indicate that we want to take physical delivery of the material. This rise may be positive for 15%
40'000
copper: since 2010, a decent correlation with a 2-month delay can be found between LME
cancelled warrants and LME spot prices (as illustrated by the chart on the right, bottom). 30'000 10%
The surge in cancelled warrants also suggests further destocking in LME warehouses (LME 20'000
inventories have been decreasing since September this year, from 473,700 to 356,825 ton- 5%
10'000
nes) and also coincides with a strong restocking process in China, realized through im-
ports. As a good (but not perfect) correlation has been found between LME cancelled war- 0 0%
Apr-07
Jul-07
Oct-07
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Jan-11
Apr-11
Jul-11
Oct-11
Jan-12
rants and Chinese refined copper imports over the past years (chart, bottom) and as China
has entered a strong restocking cycle, we can suspect that most of these copper orders
are addressed to China.
Copper LME Cancelled Warrants vs. Spot Prices China Refined Copper Imports vs. LME cancelled warrants
60'000
9'000 500
China refined copper imports, m/m change, 3-mth average, LHS
Cancelled Warrants, w/w change, 2-mth average 50'000 LME cancelled warrants, m/m change, 2-mth average, RHS 40'000
400
7'000
LME Spot prices, w/w change, 2-mth average, 2-mth 40'000
retreated 300 30'000
5'000
Cancelled Warrants, Tonnes
30'000
200 20'000
3'000 Price $ per Metric Tonnes 20'000
Cancelled Warrants
Metric Tonnes
100
10'000
1'000 10'000
0
0 0
-1'000
-100
(10'000)
-3'000 (10'000)
-200
(20'000)
-5'000 (20'000)
-300 (30'000)
-7'000 (30'000)
Sources: Diapason, LME, Bloomberg
-400 (40'000)
Sources: Diapason, Bloomberg
-9'000 -500 (50'000) (40'000)
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Mar-06
Jun-06
Sep-06
Mar-07
Jun-07
Sep-07
Mar-08
Jun-08
Sep-08
Mar-09
Jun-09
Sep-09
Mar-10
Jun-10
Sep-10
Mar-11
Jun-11
Sep-11
Nov-08
Nov-11
May-08
May-09
May-11
Dec-07
Feb-08
Aug-08
Feb-09
Aug-09
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Jan-11
Mar-11
Jul-11
Sep-11
Jan-12
For important Disclaimers and Disclosures, please refer to the last two pages of this publication 9
JANUARY 20,2012 SPECIAL ISSUE The Diapason Capital Markets Report
China’s production of base metals strong in late 2011, as smelters try to meet quotas
China Refined Copper Production, Metric Tonnes Marion Megel (marion.megel@diapason-cm.com)
500'000
Sources: Diapason, Antaike
China released its estimates for the December 2011 metals production levels and
450'000 therefore for the whole year 2011. December was a strong month as for the do-
400'000 mestic production of base metals, after a long period of decline, due to energy
supply issues and little availability of raw materials. Indeed, it seems that smelt-
350'000
ers have ramp up production in the last month of the year in order to meet the
300'000 2011 figures.
250'000
China’s production of refined copper rose in December, for the first time since
200'000 August, by 2% m/m and by 8% y/y, and reached 457,000 tonnes. In 2011, re-
150'000 fined copper output totalled 5.179 million tonnes, a strong rise of 14% from
2010. In January, copper production should decline, mostly due to the Chinese
100'000
New Year festivities, as China’s markets will close for one week from January
50'000 22nd. For 2012, some projects should come on stream and could potentially add
0 about one million of refining copper capacity. However, the copper market has
Apr-05
Jul-05
Oct-05
Jan-06
Apr-06
Jul-06
Oct-06
Jan-07
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Oct-11
often experienced severe disruptions over the past years, which have slashed
additional production. This is why we remain cautious when assessing the 2012
copper production.
China monthly primary aluminium production, daily China’s production of primary aluminium rose 4% m/m in December, on the first
average, Thousand Tonnes rise in six months. On a year on year basis, production climbed by 15.5%, to
60
Sources: Diapason, IAI, Chinese Customs
1.427 million tonnes. For the full year 2011, aluminium output jumped 11% to
17.555 million tonnes. For 2012, we expect production to rise at a much slower
50 rate due to production cuts in the country, as margins have become very tight.
The recent rise in energy tariffs has also brought additional pressure on margins.
40
Production of zinc increased by 10% m/m and 15% y/y in December, to the
monthly record of 514,000 tonnes; bringing the 2011 total production to 5.344
30
million tonnes, up 4% from 2010.
20 Refined lead production rose 4% m/m and 15% y/y to 439,000 tonnes in raise
capacities. For 2011, output totalled 4.732 million tonnes, up 12% on the year.
10
Nickel had the biggest yearly output rise in 2011 among base metals, as it
surged by 34% to 276.571 tonnes. December output dropped however by 1%,
- on the second consecutive decline, after the October record high.
Dec-07
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Mar-07
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Sep-07
Mar-08
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Sep-11
For important Disclaimers and Disclosures, please refer to the last two pages of this publication 10
JANUARY 20,2012 SPECIAL ISSUE The Diapason Capital Markets Report
Copper fundamental drivers: deficit in 2012 will probably be 100,000 tonnes
Marion Megel (marion.megel@diapason-cm.com)
The copper market is likely to remain in deficit this year, by about 100,000 tonnes. This Copper Supply/Demand Balance, Million Metric Tonnes
would be much smaller than the estimated 2011 deficit, which already totalled 170,000
tonnes from Jan. to Sept. 2011, according to the International Copper Study Group. World Supply 2005 2006 2007 2008 2009 2010 2011f 2012f
Demand growth in China should remain strong. We believe that even in the case of a World mine production 14.9 15.0 15.5 15.6 15.9 16.1 16.2 17.1
slowdown in China’s industrial activities, the Middle Kingdom should import large volumes World refinery supply
of copper, in order to replenish its warehouses, as the restocking cycle has started. SHFE Electrowon 2.7 2.8 3.0 3.1 3.3 3.3 3.4 3.9
Primary 11.7 11.9 12.2 12.3 12.2 12.4 13.3 13.9
inventories were indeed at critical levels before improving strongly through December, Secondary 2.2 2.6 2.7 2.8 2.8 3.3 3.3 3.5
from 57,655 to 120,452 tonnes currently (last week stocks up 66% m/m). The current Total Refinery Supply 16.6 17.3 17.9 18.2 18.3 19.0 20.0 21.3
low LME prices and the relatively weak domestic production have also encouraged the
restocking activities. As a result, imports have been remarkable in the past months. In Refined Demand 2005 2006 2007 2008 2009 2010 2011F 2012F
December, China’s imports of unwrought copper and semi finished copper products hit a China 3.7 3.6 5.0 5.2 7.2 7.6 7.8 8.3
record high, up 12.6% on the month, to 508,942 tonnes. Refined copper imports data for As a % of world total 0.2 0.2 0.3 0.3 0.4 0.4 0.4 0.4
December have not been released yet but November figures were already at the second Brazil, Russia, India 1.4 1.5 1.5 1.5 1.2 1.4 1.8 1.9
USA 2.3 2.1 2.1 2.0 1.6 1.8 1.7 1.7
highest level in history, after June 2009. In addition, last Friday saw a jump in LME cop-
W Europe 3.5 3.8 3.6 3.4 2.8 2.9 3.0 3.0
per cancelled warrants (a proxy for physical copper orders): From 49,225 tonnes on
Others 5.9 6.0 6.0 5.8 5.3 5.7 6.1 6.5
Thursday (14% of LME inventories), cancellations totalled 66,025 tonnes (18%) at the Total Refined Demand 16.7 17.0 18.2 18.0 18.1 19.3 20.4 21.4
end of last week. We suspect that these orders are addressed to China, in phase with its
restocking cycle. Implied Balance (0.13) 0.30 (0.26) 0.19 0.19 (0.30) (0.38) (0.10)
On the longer term, we remain positive on China’s demand for copper, even though the
Copper LME Cash Price vs. LME + SHFE Stocks K tonnes
demand growth should slow down. The country indeed wants to spend further on urbani- US$/mt
zation. A government plan includes a further $390-bn investment to expand the rural 12'000 800
power grid between 2011 and 2015. Beijing plans building 10 million social houses in LME Inventories SHFE Inventories Cash Price
700
2012, meaning that even if the private investments drop, public spending should support 10'000
copper. The latest forecast from China’s Antaike estimates that refined copper demand 600
should increase by 6% in 2012 (a slow down from this year’s estimated 8%). 8'000
500
Supply should remain constrained in the coming months, contributing largely to the 6'000 400
global market tightness. In November 2011, Chile’s copper production fell further, by 2%
y/y, extending the previous losses, due to a myriad of reasons including strikes, adverse 4'000
300
weather and power outages. As a result, 2011 production could be at least 6% below pre- 200
vious consensus’ estimates, according to Chile’s producer Coldelco. For 2012, we expect 2'000
the disruption rate to stand around 6%, leading to an increase in mining supply of about 100
940,000 tonnes, vs. theoretical increase of 1m tonnes given new projects. China’s copper 0 0
production decreased further in November, down by 4% m/m, on raw materials supply
Apr-08
Jul-08
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issues. Production is now only 9% above November 2010 levels.
Inventories at LME warehouses have continued to retreat last week, as expected, to Sources: Diapason, Bloomberg, LME, SHFE, IGSG, WBMS, Antaike, ICA
356,825 tonnes, now 6% below last year’s levels. Also, China’s SHFE stocks have contin-
ued to inflate (as detailed above).
For important Disclaimers and Disclosures, please refer to the last two pages of this publication 11
The Diapason Capital Markets Report
Contact Information
Diapason Commodities Management S.A Diapason Commodities Management UK LLP
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salvatore.miserendino@diapason-cm.com
Research Team __________________________________
Sean Corrigan Robert Balan Alessandro Gelli Marion Megel
Chief Investment Strategist Sr. Market Strategist Fundamental Research Fundamental Research
sean.corrigan@diapason-cm.com robert.balan@diapason-cm.com alessandro.gelli@diapason-cm.com marion.megel@diapason-cm.com
Edouard Mouton Fabien Espic Victor Neamtu
Quantitative Research Quantitative Research Quantitative Research
edouard.mouton@diapason-cm.com fabien.espic@diapason-cm.com victor.neamtu@diapason-cm.com
The Diapason Capital Markets Report is published and edited by Robert Balan, Senior Market Strategist
Robert Balan has more than 3 decades of experience in the financial markets. Education in mining engineering and computer science led to a commodity analysis career during the commodity
boom of the early 1970s. Robert made a switch to global macro focus in the early 1980 when the commodity bull market waned, with specialization in foreign exchange. Robert wrote a very
high profile daily FX analysis while Geneva-based in the mid-1980s (the first FX commentary with a real global readership, "most accessed" in the Reuters and Telerate networks from 1988 to
1994). He worked for Swiss Bank Corp and Union Bank of Switzerland (precursors of today’s new UBS) as head of technical research and proprietary trader in various major finance centers
(London, New York, and Toronto) from late 1980s to mid-1990s. A stint at Bank of America as head of global technical research (London, New York) followed in late 1990s to early 2000s. He
returned to Switzerland in 2004 as head of technical research and strategy, and FX market analyst for Swiss Life Asset Management in Zurich. He joined Diapason Commodities Management
in 2008 as senior market strategist utilizing macro-economic drivers and structural/technical data in modeling asset price and sector movements. Robert wrote a book on the Elliott Wave Princi-
ple in 1988, hailed by the London Society of Technical Analysts as best book ever written on the subject. Robert is a member of the National Association for Business Economics (NABE), USA.
© Diapason Commodities Management SA 2012
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