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Non-ferrous metals outlook for 2020

Jan 07, 2020 | 04:00 AM |


The fortunes for base metal markets have been mixed and volatile in 2019. Myra Pinkham asked seasoned analysts and observers to identify key market drivers for 2020 and beyond

While uncertainties prevail, there seems to be growing optimism that 2020 will be at least a marginally better year for non-ferrous metals markets. There is also potential for further improvement in 2021, especially if, as many hope, a US-China trade deal is successfully negotiated and various central banks will be able to successfully stimulate global base metals demand.

Andrew Cole, senior metals analyst for Fastmarkets MB pointed out that across the board demand for non-ferrous base metals has slowed. “For example, we are forecasting copper demand growth of just 1% for 2019, down from a range of 2.3-3.3% in the 2016-2018 period.”

Perhaps the weakest of the non-ferrous base metals has been zinc, driven by global weakness in galvanized steel demand, according to John Mothersole, director of HIS Markit’s pricing and purchasing service. Mothersole said that the overall decline in non-ferrous base metals demand has been a big disappointment, given the early optimism that the market could possibly get some lift out of China in 2019. “But that never materialized. Instead, base metals demand growth was adversely impacted by a synchronized slowdown in global economies,” particularly a softening in manufacturing activity worldwide.

Overall the year was a bit of a mixed bag and was somewhat counterintuitive, according to Sergey Donskoy, a metals and mining analyst with Société Générale, explaining that while the first half was more favorable for copper producers, with higher prices on average notwithstanding pretty weak Chinese demand. “However, the second half was considerably weaker with prices almost lacking any positive momentum even as Chinese demand finally started to show some signs of life.”

Donskoy described the year as being more disappointing for zinc miners, many of which were barely able to generate cash at current prices, especially given the spike in treatment charges, and for aluminium smelters, given falling LME prices and weak premiums, while it was something of a positive surprise for nickel producers.

Geordie Wilkes, head of research for Sucden Financial, pointed out that miners and primary metals producers alike were negatively impacted when trade tensions intensified in the second and third quarters of 2019. Cole agreed, attributing much of the recent weakening of non-ferrous metal demand to the fallout from the US-China trade dispute and the resulting slowdown in global economic growth. He is, however, forecasting modest rebounds in global non-ferrous metal demand growth in 2020 – for example, 2.1% growth for copper and 2.7% growth for aluminium.

“There appears to be some light at the end of the tunnel regarding trade issues, especially with the US presidential election coming up,” Wilkes said, predicting that a US-China trade deal could be completed in the first half of 2020, which would improve market sentiment during the second half of the year. “While it will take a while for that to be seen in the underlying economic indicators, it should help the metals market to be more positive going into 2021, assuming that we manage to avoid a recession,” Wilkes said, which he thought is likely despite the fact that there are still some significant headwinds in the global economy.

Cole had a similar view, observing that the US and China seem to be edging towards at least a “phase one” trade deal. “If they can sign a deal and lift some tariffs, then confidence should start to return to both the industry and to consumers, lifting demand,” he said, adding that supply chains have probably become quite understocked given all the uncertainty – especially the supply chains tied to the automotive industry, which has been particularly hard hit. “A recovery in confidence could trigger some restocking, which will result in a further boost to metal demand and prices,” Cole said.

Long-term outlook

A spokeswoman for the National Mining Association in the United States voiced optimism for the long-term outlook, declaring, “We are living in the most minerals-intensive time in history and demand for minerals is only set to increase in the years to come.” She added that US governmental policies will be a key factor in determining whether the domestic mining industry will be able to meet those increasing demands or whether there will be a continued need to deepen its import reliance.

She pointed out that – as a follow-up on a December 2017 US executive order calling for a federal strategy to ensure secure and reliable supplies of critical minerals – in June 2019 the US Commerce Department, in conjunction with the Department of the Interior, Department of Defense and various other federal agencies, issued a report recommending a number of key reforms to ensure a reliable supply of minerals in the US. It included a call to reduce federal permitting timeframes, improve access to domestic critical mineral resources on federal lands and consideration of mining under projects covered by the Fixing America’s Surface Transportation (FAST-41) Act, all of which, she said, holds promise for the domestic mining industry.

China is key

Overall, China is where analysts look for the future of non-ferrous metal markets. Mothersole said that is why there is general concern about the general deceleration of growth there. Despite the intention by the government to double its GDP between 2010 and 2020, Mothersole says that Chinese GDP growth averaged about 6.2% in 2019 and is forecast to fall below 6% in 2020. He said that seems to indicate that additional stimulus might be provided to enable it to ensure that its growth meets that pledge target.

The Chinese construction sector was clearly not performing as well in 2019 as it had in 2018 and the Chinese automotive sector – much like the automotive market in most major regions of the world – was softer than expected.

“There was hope that we would have seen some targeted stimulus to boost infrastructure investment,” Mothersole said, adding that, in addition, there were some hints that there would be “dollops” of construction investment in China, “But that really hasn’t materialized to the extent that I thought would occur.”

Wilkes said that while grid investment was down significantly year to date through September, it is likely to increase in 2020 as people across the globe start preparing for 5G communications, which is more metal- and power-intensive. This could be especially supportive of underlying copper demand, which Michael Widmer, a Bank of America metals strategist, said, excluding the financial crisis, is currently growing at its slowest rate since the late-1990s.

In its October copper market forecast the International Copper Study Group (ICSG) forecast that, partly because of lower than expected “real” demand growth in China, global apparent usage of refined copper only increased 0.3% in 2019.

However, Carlos Risopatron, ICSG’s director of environment and economics, said he believes this will just be temporary and that global refined copper consumption growth is projected to increase by 1.7% in 2020, especially given that the Chinese real estate market is using more copper than it did in 2018. Also, he said that while Chinese utility transmission and distribution network spending slowed somewhat in 2019, such investments in the rest of the world have been very healthy, supported by increased demand for electric vehicles (EVs), given that electric motors rely upon copper to operate. In fact, he said that 600,000 tonnes per year of new copper foil plant capacity has come online to support anticipated growth in that market.

Negative sentiment

While negative sentiment is not unjustified, Mothersole said it is masking what appears to be a tightening global copper market. He observed that the market has been, and remains, in a deficit, with very sluggish mine and refined production growth. Even though the ICSG reported that mine production declined by about 0.5% and that refined production was just up by about 0.5% in 2019, the ICSG is forecasting a 2% increase in mine production and a 4% increase in refined production in 2020.

“On the mine side, the copper industry had its usual share of disruptions, leading to an underperformance that we’ve become used to,” Cole said. He observed that on top of some unplanned outages in the copper mining industry, Freeport McMoRan’s Grasberg Mine’s transition to underground operations has significantly reduced its output at the same time as another major Indonesian copper-gold mine, PT Amman Mineral Nusa Tenggara’s Batu Hijau Mine, is also going through a transition phase. This resulted in about a 300,000 tonne loss in mine production in Indonesia alone.

“Also, a big risk for copper miners is in Chile and elsewhere in South America, given the fiscal uncertainty and political unrest there,” Wilkes said, especially given the rapidly weakening Chilean peso. He said that while he is hopeful that there will not be an escalation of tensions, it does have the potential to affect mine supply. Another issue, Risopatron pointed out, is the grade of mine production, including higher levels of arsenic and other impurity in copper concentrates.

Cole said, “2019 has been just about as bad for primary copper smelter and refinery production,” given a plethora of setbacks, including lengthy plant shutdowns in Chile for environmental upgrades and shutdowns in Zambia because of power supply problems and concentrate duties. He also noted that this was offset by a huge increase in Chinese primary copper smelting capacity in recent years.

TC-RCs

Wilkes said that, given low treatment and refining charges (TC-RCs) – as well as low prices for byproduct sulfuric acid – some Chinese copper smelters are operating at a loss, and there could be further downward pressure in 2020 as well. Widmer agreed, noting that expectations are that contract TC-RCs will go from $80 per tonne in 2019 to $62 per tonne in 2020, at the same time as additional Chinese capacity continues to come online, which will result in even more pressure being put upon smelters, keeping their capacity utilization rates low despite projections of a good acceleration in copper demand growth.

ICSG is projecting that the global refined copper deficit will move into about a 280,000 tonne surplus in 2020 from a 320,000 tonne deficit in 2019, despite a reduction in refined copper production outside of China. However, Risopatron said he is uncertain whether the Chinese smelter capacity boon is sustainable if copper concentrate production, which has been stagnating at about 10 million tonnes for the past four years, does not grow. In fact, Mothersole said that, given his expectations of continued supply side weakness, he believes that the market could be at the cusp of a sustained price rally that could take LME prices back up to about $6,500-$6,600 per tonne.

Contrasting zinc

“Zinc is an interesting contrast to copper,” Cole said, observing that after three years of zero-to-negative growth in both zinc mine and primary refined production, that started to turn around in 2019, marked by a start up of several new mines in addition to the restart of some old mines. This, however, comes as zinc demand is being hit by a “double whammy” of softer galvanized demand for both construction and automotive applications as well as expectations that zinc inventories could increase in 2020.

Widmer observed that while LME zinc prices, which, while volatile, have been overall well supported, have been coming down, falling to $2,236/tonne as of early December from a peak of nearly $3,000/tonne in April. He said this has taken some of the upside away from zinc miners at the same time as treatment charges have rallied sharply, providing a lot of pain for smelters.

The International Lead and Zinc Study Group (ILZSG) has forecast a 2% increase in global zinc mine production in 2019, to be followed by another 4.7% increase in 2020. It is also forecasting that global refined zinc metal production will rise by 2.5% in 2019 and 3.7% in 2020.

Given the fragmentation in the zinc market, Widmer said that the increased mine output will be coming from a number of operations, but most notably the ramping up of MMG’s Dugald River Mine and Glencore’s Lady Loretta Mine, as well as the commissioning of Heron Resources’ Woodlawn tailing project and Vedanta’s Gamsberg operation. According to ILZSG, 2020 mine output increases will come from several new projects and expansions in India, Kazakhstan, Mexico and Portugal.

While in a 178,000 tonne deficit in 2019, ILZSG is forecasting a 192,000 tonne surplus in 2020, which Wilkes said will put downward pressure on zinc prices and spreads.

On the other hand, Mothersole said that nickel has been the standout metal, predicting that nickel consumption was up about 3% in 2019, with stainless steel production holding up surprisingly well much of the year. But he said that it is somewhat uncertain where it will be going from here, given some of that surge in apparent consumption is related to panic buying with the Indonesian ore export ban expected to go into effect in January, which has been assumed to result in a buildup in inventories, especially in China. Mothersole said that while longer term increased demand for EVs would boost nickel demand, he believes that any meaningful movement in that direction is still at least two to three years away.

“At the moment sentiment is on the backfoot,” Wilkes says, especially given expectations that some of the nickel taken out of LME warehouses could be returned in 2020, which could put downward pressure upon prices, which have recently been moving down. “We are currently trying to speculate how low nickel prices will go,” Mothersole said, stating that after overshooting on the upside at about $18,000/tonne due to the panic buying, he believes that about $15,500/tonne is a defensible average price for 2020. As of the first week of December, the price had fallen to $13,200/tonne.

Challenges for aluminium Wilkes observed that 2019 has been a challenging year for aluminium, marked by a progressive downturn in underlying aluminium demand as uncertainty took hold of the market, as well as increases in smelter production and capacity and an abundance of finished product inventories. In fact, he noted that it has been reported that there are over 5 million tonnes of off-exchange aluminium stocks in China alone, adding: “Even if we see a positive response in both the automotive market and the Chinese property market, aluminium in stocks are greater than the potential Chinese deficit for 2020.”

But for non-integrated companies, Widmer said it is alumina refineries which are under the most pressure given the low alumina prices – under $300/tonne – now that Norsk Hydro’s Alunorte refinery in Brazil is bringing 6 million tonnes of capacity back into a market that is already oversupplied.

Mothersole, however, said that he believes 2020 will be a better year for aluminium, especially given that, absent a recession, he is hard pressed to see it getting much worse. He admitted that his forecast for aluminium consumption growth of under 2% is not very encouraging, “But it is better than the 0.5% or less we saw in 2019.” He also sees LME aluminium prices, which were
$1,750/tonne as of December 6, as being unsustainable, so they need to come up. But to do so there will need to be some capacity rationalization.

While he said it is China that needs to cut the most, he could not say who will make the “painful” cut. But something needs to happen on the supply side to lift pricing. Clearly companies are already studying the situation. For example, Alcoa Corp said during its third-quarter earnings call that it is undergoing a multiyear capacity review that could result in potential asset sales.

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