Phillip Futures discusses the performance of the Base Metals in Q Base Metals. Report by Daniel Ang, Investment Analyst at Phillip Futures

Transcription

1 Phillip Futures discusses the performance of the Base Metals in Q Base Metals Outlook for Base Metals in Q3 2015, based on fundamental and technicals. Report by Daniel Ang,

2 Overview on Base Metals With the slowdown in global economic growth, base metal prices found difficulty to increase. Lacklustre demand did not improve despite the stimulus from China. The Chinese market remains weak and this weighs down on base metals as the market fails to find demand, giving a bearish sentiment to the markets. Apart from slow growth coming from China, we are also seeing the US Dollar (USD) strength play a part in altering prices. This has caused the primarily movements in prices to be swayed by the USD strength. Ever since the Q1 2015, the US has been showing signs of weakness. This caused the US Dollar Index to drop from 100 to 93. Considering that most base metals are denoted in the USD, a weaker USD suggests lower prices. This can be seen from the table below, showing that the inverse relationship between the US Dollar Index and metal prices, comparing Q1 and Q2, is increasing. This explains the small rally in base metal prices towards the end of Apr 15. Confidence in the US economy returned subsequently, causing this rally to be short-lived as prices came back down. This resulted in most base metals maintaining their prices as seen in the last quarter with small movements. Source: Reuters, Phillip Futures As we move into next quarter, the probability of a US rate hikes increases and believe this would most likely happen. This means that we should be seeing more strengthening of the USD. This puts a bearish tone on base metals from the currency angle. The base metals scene could turn bullish provided economic growth strengthens; however, we would unlikely see this happen in the next quarter. As we have not seen much optimistic data, we find it unlikely that base metals prices could move upwards. 2

3 COPPER Forecast for Q View: BEARISH Price target: $5,384 After hiking at the start of Q2 2015, LME copper dropped and ended up 6.32% (31 Mar Jun 15) lower compared to the end of Q The drop in copper prices coincided with drops in copper inventories as seen at the start of June. Although this is contrary to the fundamental relationship between commodity stocks and prices, we believe this is coming from the lack of expectations that this would lead to shortage issues. China is the most crucial importer of copper coming from 2 areas, infrastructure and manufacturing demand. With both a slowdown in infrastructure and the global economic, it is very unlikely that we will be seeing a shortage in the next quarter. Therefore, prices should continue to be unfazed by the drop in inventories. Graph: Daily LME Copper 3M Rolling Prices Graph: LME Copper Inventories 3

4 Technically, we are continuing to see a bearish copper market. Analyzing copper prices and its deviation from the daily SMA200, we hardly see prices hit above the daily SMA200 over the past 4 years. Apart from several periods, copper prices have hardly showed any bullishness like it had during China s economic boom. Therefore, would think that moving forward, we are still in the bearish market. In fact, moving into the next quarter, we find it difficult for prices to even break the SMA200. Despite this, even if we do see prices reverse, we would believe it would be only temporary and it would most likely only move 5% above the SMA200. This occurrence should not last for long. Therefore, moving into next quarter, we believe that prices should find support at $5,654, $5,521 and finally $5,384. Even if it moves upwards, prices should stop at SMA200 as it finds heavy resistance there. Graph: LME Copper prices deviation from SMA200 in percentage 4

5 ALUMINIUM Forecast for Q View: Sideways movements with slight BEARISHNESS Price Target: $1,574 Apart from the spike we have seen in the middle of the quarter, LME Aluminium prices mainly trended sideways. With the global economic slowdown persisting, prices fell on lacklustre demand resulting in a drop by 5.24% (31 Mar Jun 15) compared to the last quarter. With LME s increased efforts to reduce waiting times for aluminium buyers to receive their orders, LME Aluminium inventories have been on the decline since the start of the year. We would think that the sharp decrease comes from buyers finally getting their orders. However, would note that inventories have been dropping at an alarming rate and believe that if this continues, aluminium markets could end in a deficit. Graph: Daily LME Aluminium 3M Rolling Prices Graph: LME Aluminium Inventories 5

6 LME Aluminium prices have been more or less in a bear market with prices maintaining below the daily SMA200. We would exclude the spike we see in Q as this was a result of long waiting times for aluminium deliveries. With LME s commitment to fix the issue, history should not repeat itself and would label this event as an anomaly. Therefore, taking this into consideration, we continue to believe that the SMA200 would reflect a strong resistance moving forward. We believe that this resistance could be tested provided LME aluminium inventories continue to drop at fast pace. This would be signalled by prices breaking the SMA200 and would mean that the market believes that a shortage is at hand. However, we find it unlikely with a lacklustre global demand for aluminium. We believe that it is more likely that prices find support at $1,677, $1,574 and $1,435. If inventories do not show signs of shortages, we would expect prices to find strong support at $1,574 and do not expect this support level to break. Graph: Daily LME Aluminium 3M Rolling Prices with SMA200 6

7 ZINC Forecast for Q View: Slightly BEARISH with strong price supports Price Target: $2,000 LME Zinc prices hiked as a result of both a weakening USD as well as fears of a shortage. Prices decreased by -1.71% (31 Mar Jun 15) compared to the last quarter after shortage fears eased. This was reflected by the increasing LME Zinc inventories as seen at the end of the quarter which caused prices to fall. With Zinc s imports mainly concentrated in the Asian region, namely, China and South Korea, we do not expect improvements in the next quarter. Asia s growth is expected to continue to be weak moving forward. Graph: Daily LME Zinc 3M Rolling Prices Graph: LME Zinc Inventories 7

8 We find a strong support trend for LME Zinc by connecting the lows of the past 5 years. As seen in the graph below, we hardly see prices fall far below this trend line shown in the graph below. Thus, even in the midst of bearishness that we have pointed out before, we do not expect to further drops because of this support. In an event that prices do fall further, we still expect prices to find support at $1,988, $1,915, and $1,867. Even if we were to see the US Dollar Index as well as a persisting weak Chinese growth continuing into the next quarter, we would at most expect prices to test $1,915. On the flip side, this also means that further upside would be difficult. Without any signs of a shortage, we hardly find potential for prices to move up and thus, do not expect prices to break resistance of $2,210. Graph: Daily LME Zinc Prices with Trend Line 8

9 LEAD Forecast for Q View: Slightly BEARISH with strong price supports Price Target: $1,700 LME Lead prices increased in the middle of the quarter as a result of the weakening USD. This is on top of LME Lead inventories reaching a 5 year low, causing prices to increase on fears of a shortage. However, after inventories remained robust, the fear eased resulting in prices increasing by only 1.92% (31 Mar Jun 15) compared to last quarter. Inventories even got a scare when it found strength with high amounts of warrants being cancelled, causing inventories to spike upwards. Following that scare, inventories have been dropping since. Moving into the next quarter, if this continues, we may see LME lead inventories returning back to the 5 year low and prices could move up in the next quarter as a result of this. Graph: Daily LME Lead 3M Rolling Prices Graph: LME Lead Inventories With prices falling in the later part of Q2 2015, we are seeing prices reaching to the 5 year low of $1,700 which we have seen earlier in the year. With prices reaching to newer lows, we expect prices to face heavier supports as it moves downwards. We expect the next few levels of support to come at $1,761, $1,728 and $1,677, with $1,677 being a level that would unlikely be breached. The strength of these supports would likely be dependent on the LME Lead inventories. If inventories continue to drop, we may see prices find more support moving forward. 9

10 TIN Forecast for Q View: Sideways movements with possibility of bullishness if inventories continue to fall Price Target: $14,274 LME Tin prices continue on its decline from Q1 and into Q2 2015, with prices declining by 7.29% (31 Mar Jun 15). With tin s usage primarily used for soldering, a weak manufacturing growth dampens demand for tin. This sends the market into bearishness causing prices to fall. Despite the bearishness, it seems the inventories have been dropping, inching near to the 7 year low. If this continues, we may see prices starting to soar when the market panics on possible shortages. Graph: Daily LME Tin 3M Rolling Prices Graph: LME Tin Inventories 10

11 Analysing the deviations between tin prices with its daily SMA100, we will notice that prices have never crossed the SMA100 for the past year. This emphasises the bearish tin market we are in. this indicates a very strong resistance at SMA100 for prices moving into the next quarter. Considering that inventories are dangerously low, a sudden disruption in production could easily send prices surging. In this event, we expect to see the SMA100 display a strong resistance for prices. If prices could surge past the SMA100, we believe this would be a clear indication of the insufficiency. On the contrary, considering that prices are already at 5 year lows, we find it unlikely that prices could drop further. Even if prices do fall, we expect prices to hold above support of $14,274 and $13,600. Graph: LME Tin prices deviation from SMA100 in percentage 11

12 NICKEL Forecast for Q View: Sideways movements Price Target: $11,600 Nickel finds difficulty in moving down further with uncertainties ahead. The possibility of a shortage increases after one of the biggest exporter, Indonesia, decided to implement an export ban on unrefined metals. This has allowed nickel to survive the downward pressures we have seen on majority of the other base metals with prices increasing by 2.54% (31 Mar Jun 15) compared to the last quarter. However, despite the fears of a shortage, LME nickel inventories have only started to show weakness after it peaked at 0.47m. This means that the fears of a shortage could be unfounded and depending on how inventories play out in the next quarter, we may not even see shortages despite reforms in Indonesian nickel industry. Graph: Daily LME Nickel 3M Rolling Prices Graph: LME Nickel Inventories 12

13 Technically, we are seeing the daily SMA100 acting as a very strong resistance as prices fail to move above over the past year. This level is constantly tested over the year as prices find difficulty to move higher. Therefore, expect to see prices not exceed $13,552 even if prices increase. This would likely depend on the LME Nickel inventories and only unless it shows continued weakness, then we could expect this resistance to be tested. Other than that, we expect to find support for the next quarter to be at psychological level of $12,000 and subsequently at $11,600 and $11,334. These levels were previously only seen in post 2008 financial crisis suggesting strong supports there. This makes us skeptical over further drops to prices and believes that prices should not break support of $11,600. We would probably see prices consolidate and move sideways for the first half of next quarter. If demand picks up or a shortage comes into the picture, then, we could then see prices increase. Graph: Daily LME Nickel 3M Rolling Prices with SMA100 13

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