The structural improvement of base metal market fundamentals should support broadly bullish expectations for 2015, Bank of America Merrill Lynch said in a research note Wednesday.
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The bank said the base metals complex has been one of the best performing commodity complexes year-to-date, but said that macro-economic cross-currents have provided substantial headwinds to demand.
This saw the rally across the complex stall over the summer with metal prices retracing some of their gains from earlier in the year.
"The challenged fundamental backdrop has been visible in many of the usual macroeconomic metrics, with headline Purchasing Manager Indices (PMIs), a proxy for the strength of base metals offtake, trending lower in Europe, the US and China," BofA Merrill Lynch said.
The bank added that the loss in growth momentum is particularly problematic because China is no longer the sole price driver, given the structural changes and slowdown in the country's economy.
On this assumption, base metals have reverted to being a trade on global rather than Chinese growth alone, so many mined commodities can only rally when both China and the world ex-China are cyclically strong.
FUNDAMENTALS TO SUPPORT METALS
"While cyclical headwinds persist for now, we note that the structural improvement of individual base metal fundamentals continues to unfold," the bank said.
The improvement in market fundamentals has been most visible in the aluminium market with a shift into into deficit on the back of more than 3 million mt of output curtailments in the world ex-China.
"The production discipline is one of the reasons, LME stocks have been declining of late, a development we expect to continue going forward," the bank said.
The bank is forecasting an average LME aluminium price of $2,010/mt in 2015.
BofA Merrill Lynch said copper has the weakest fundamentals but notes that imports were subdued over summer due to sustained de-stocking in China.
With inventories now relatively low, the bank sees scope for a tactical rebound of prices into 2015.
"We also acknowledge that [China's] infrastructure spending for instance on the power grid has been below target between January and August, so a potential pick-up in spending may help copper demand as well," it said.
The bank is forecasting an average LME copper price of $6,939/mt in 2015.
On nickel, the bank said that supply and demand dynamics are set to become outright bullish only through 2015.
The next push higher in nickel quotations is dependent on a strengthening of market fundamentals, including higher Chinese refined and ferronickel imports and declining LME stocks, it said.
BofA Merrill Lynch is expecting a 50,000 mt nickel deficit in 2015.
The bank is forecasting an average LME nickel price of $23,836/mt in 2015.