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Metals book mixed performance amid stronger dollar, trade uncertainty

There was a rise in geopolitical tensions last week amid escalations in Gaza and the West Bank as well as threats that a planned meeting between the North Korean and U.S. governments might fall through.

The U.S. embassy's move to Jerusalem from Tel Aviv sparked violent demonstrations in West Bank and Gaza, with close to 60 fatalities reported.

A historical meeting between North Korea and U.S. President Donald Trump in June came under threat after Pyongyang issued a surprise statement declaring the country would not trade away its nuclear weapons capability in exchange for economic aid.

The U.S. dollar strengthened throughout, helped by a rise in U.S. Treasury yields that indicated an upbeat outlook for the country's economy.

Sentiment for metals was mixed amid ongoing uncertainties over the China-U.S. trade dispute, the outlook for global growth and a further rise in the U.S. dollar.

Price ring

Copper booked the first weekly loss in three weeks, dropping 0.7% to US$6,857/tonne on the back of a stronger dollar and global growth concerns. The red metal is still up more than 23% in the last-12-months.

Aluminum fell to a two-week low May 18 amid easing concerns over supply constraints following news that Russian businessman Oleg Deripaska would not seek re-election to United Co. Rusal PLC's board. The oligarch had been hit by U.S. sanctions that threatened Rusal's ability to trade. On a weekly basis, aluminum climbed 0.3% to US$2,280/t.

Nickel was the best performing metal last week, gaining 3.8% to US$14,529/t by close May 18, while zinc was up 0.9% to US$3,093/t and lead booked a loss of 0.3%.

Iron ore remained widely flat at US$65.60/t with a marginal 0.2% gain on the previous week.

Precious metals plummeted across the board, with gold down 2.1% to US$1,292/oz and silver dropping 1.3% to US$16.40/oz.

Talking Points

Fitch Ratings overhauled its midcycle metals price forecast, increasing its medium estimates for aluminum, copper, iron ore and nickel but cutting its price assumptions for zinc.

On the back of a strong start to the year and an average price of US$74/t in the first three months, Fitch now expects iron ore to average US$60/t in 2018, compared to US$55/t previously. The ore is expected to stay steady at US$55/t in 2019 and 2020, while the new long-term estimate was increased to US$55/t from US$50/t.

However, the team said there is plenty of room for a price drop, which is likely to commence in the second half as companies including Vale SA, Roy Hill Iron Ore Pty. Ltd. and Rio Tinto add volumes to an already oversupplied market.

Copper estimates were lifted to US$6,700/t in 2018 and 2019, from a previous level of US$6,000/t and US$6,200/t, respectively, driven by expectations of a small surplus over the next two years. The metal is anticipated to reach US$6,800/t in 2020 and US$7,000/t in the long-term, partly attributed to higher usage amid demand for electric vehicles.

Aluminum is now tipped to average US$2,350/t in 2018 and US$2,250/t in 2019, 2020 and in the long term, reflecting a significant increase on the previous forecast of US$1,900/t.

"The long-term price assumptions revision reflects a better supply-demand situation than previously expected," the team said May 16.

Alongside stronger demand for electric vehicles, nickel price revisions were driven by expectations that the market will stay in deficit until 2022, with decreasing stocks over this period.

Fitch now expects the metal to reach US$13,000/t in 2018, US$13,500/t in 2019, and US$13,000 in 2020 and in the long term. Its estimates for 2018 and 2019 previously stood at US$10,500/t and US$11,500/t, respectively.

The team cut its 2019 forecast for zinc to US$2,800/t from US$2,900/t and lowered its long-term estimate to US$2,250/t from US$2,700/t as new supplies are set to enter the market.

"We expect rising zinc concentrate supplies to begin to alleviate some of the current tightness in the second half of 2018," the team said. "By 2019 concentrate availability should comfortably exceed that of smelting capacity, and concentrate inventories should start to recover. With demand growing only marginally, the zinc market is likely to return to surplus."

Gold price assumptions remained unchanged at US$1,200/oz in the medium and long term.

The rating agency said the updated pricing assumptions are not likely to trigger multiple rating actions.

Financings

Alcoa Corp. unit Alcoa Nederland Holding BV priced an offering of US$500.0 million of 6.125% senior notes due 2028. The company plans to use the funds for general corporate purposes, including contributions to Alcoa's U.S. pension and other post-retirement benefit plans.

BlueScope Steel Ltd. priced the US$300 million issue of guaranteed senior bonds, the proceeds of which the company will use to repay the US$300 million balance of US$500 million in 6.50% senior unsecured notes issued in May 2016. The bonds will have a fixed-rate coupon of 4.625% for a five-year term, maturing May 25, 2023.

Cobalt 27 Capital Corp. secured an US$80 million revolving term credit facility from several banks to fund its mineral investments and for general corporate purposes. The facility, signed with National Bank of Canada, Bank of Montreal and the Bank of Nova Scotia, is secured by the company's assets and has an initial two-year term, with the initial drawdown subject to certain conditions.

Brazil-focused vanadium producer Largo Resources Ltd. launched a US$150 million private note offering to repay its existing debts. The notes carry a 9.25% coupon, are due in 2021 and are callable in the second and third years.

Tata Steel Ltd. is thought to be in talks with banks to secure a loan of 115 billion Indian rupees, or about US$1.69 billion, to help fund its acquisition of a controlling stake in debt-laden Bhushan Steel Ltd. Lenders engaged in discussions include Axis Bank Ltd., HDFC Bank Ltd., IndusInd Bank Ltd., Kotak Mahindra Bank Ltd., Standard Chartered PLC, State Bank of India and Yes Bank Ltd.