London — Copper and nickel are the preferred London Metals Exchange metals, while lead and zinc are the least popular among investors, according to a survey of the metals community undertaken by BMO Capital Markets during the current LME Week.
Copper gained as much as 60% of the vote for the metal with best market prospects, followed by nickel with 21%, BMO commodities analyst Colin Hamilton said in a presentation distributed Wednesday. Lead was the least favored by 26% of the total, with zinc out of favor with 24% of voters.
According to BMO's research, copper's prospects are favored by mine supply constraints which means inventories continue to decline, despite some rebuilding of LME stocks.
"Copper is in a deficit market this year, and further out we will need more supply projects," Hamilton told a seminar in the run-up to the LME Dinner Tuesday evening. The current copper market supply is put at 4.4 million mt, which is lower than the availability of a few years ago. "There are few projects in the pipeline, but a high execution rate......up to 2 million mt of supply to come on," he said.
A deficit of 160,000 mt of copper this year is likely to increase to 290,000 mt in 2020, before switching to a surplus of 115,000 mt in 2021, according to BMO. In the second quarter of 2020, copper prices are expected to average 9% above current spot levels, but in the longer term, with demand from electric vehicle charging infrastructure and other electrification projects, BMO sees them averaging 22% above current spot levels.
Tom Mulqueen, head of research at Amalgamated Metal Trading, an LME ring-dealing member, a guest speaker at the BMO event, saw "strong potential for a rebound in copper."
One factor to watch out for, however, is China's current shift towards copper cathode self-sufficiency in the downstream market, which could impact the Asian giant's annual imports of 3 million mt of copper, Hamilton noted.
In nickel, the investors' second favorite, and which is a major input in stainless steel production, price gains have come amid a supply scramble ever since Indonesia's 2014 nickel ore export ban. This week, moreover, the country has brought forward another new nickel ore export ban that was originally expected to come into force in 2020.
In a climate of some nickel "jiggery-pokery," Hamilton said the Indonesian export ban cannot be viewed as impacting market fundamentals, as nickel is still coming out of Indonesia onto world markets in different forms. It is mainly exported as nickel pig iron, production costs of which can now be considered a market indicator.
Still, "Indonesia is totally reshaping the nickel and stainless markets: more NPI from Indonesia is a challenge to world stainless producers," Hamilton said.
Nickel is in deficit and its Q2 2020 prices are expected to average 18% more than current spot prices, although prices are expected to fall below current spot levels in the longer term, according to BMO Research.
ZINC: DEMAND SEEN FALLING
Zinc, the second least favored metal according to the BMO survey, is moving towards a surplus, after a small deficit this year, even though only limited supplies are coming back on stream, according to Hamilton. At the LME Seminar on Monday, Caroline Bain, chief commodities economist at Capital Economics, said Glencore is restarting some 5,000 mt/year of capacity and some revamps are scheduled for next year. However, zinc demand is set to remain weak because of a slowdown in construction growth in China.
"China's steel production is growing, but zinc-galvanized steel is declining," she said. "Zinc prices are likely to fall further in the near term on subdued demand and a recovery in refined supply."
The market "needs to watch for medium-term demand downgrades," said Hamilton, adding that zinc consumption could potentially fall by 1 million mt by 2025. Q2 2020 average prices may fall 10% from current spot levels, he said.
LEAD: DOMINATED BY CHINA
Lead, sometimes referred to as the "forgotten metal," and which was the least liked by survey participants, brings together "pretty much everything you don't want in a market," Hamilton said. This is mainly because "China absolutely dominates the market and will be a net exporter next year," he said, noting that like zinc, lead will face "demand challenges in future."
The big story in lead this year has been the operational disruptions at the Trafigura-controlled Port Pirie smelter in Australia, which has pushed the market into deficit and significantly reduced Australia's refined lead exports. It is unclear if further disruptions will be seen at that site, Mulqueen said.
Speaking at the LME Seminar, however, Guy Wolf, global head of market analytics, Marex Spectron, said that as a vehicle for capital, lead is a "safer place to be, not so prone to volatilty as nickel and zinc."
-- Diana Kinch, email@example.com
-- Edited by Keiron Greenhalgh, firstname.lastname@example.org