(The opinions expressed here are those of the author, a columnist for Reuters.)
By Andy Home
LONDON, July 23 (Reuters) - The latest quarterly Reuters poll of base metals analysts was out earlier this week, and it lays bare the extent to which the entire market was blindsided by Indonesia’s January ban on the export of unprocessed minerals.
The ban has severely affected operations at the country’s two copper mines, but the impact on the nickel market is structural, with the flow of nickel ore to China’s huge nickel pig iron (NPI) sector choked off.
The reality of the ban has caused a dramatic change in the collective view about nickel since the January poll, which was conducted just at the time the ban was coming into effect.
Collectively caught off guard by Indonesian policy-making, analysts can take some comfort from the fact that zinc, viewed as the base metal with the best prospects back in January, has lived up to expectations. ******************************************************* Graphic on median forecasts for 2014 and 2015: reut.rs/1k89qqC Graphic on change in forecasts since January 2014: link.reuters.com/xec52w *******************************************************
Nickel is now expected to be the stand-out bull performer both this year and next, with the median forecast for average cash prices to rise by 19 percent and 34 percent in 2014 and 2015 relative to 2013.
But it wasn’t always so.
Indeed, back in January the median expectation was for nickel prices to fall by 1 percent this year, weighed down by oversupply and steadily rising inventory on the London Metal Exchange (LME).
Such has been the turnaround in sentiment that only ANZ is now forecasting an average price below $17,000 per tonne, which was the highest forecast back in January.
Nobody, it seems, really expected the Indonesians to make good on their legislative promise to halt all exports of unprocessed minerals as a way of forcing its natural resources sector down the value-added path of processing.
But six months on and the ban remains total, and analysts have been rewriting their narratives.
The median market balance forecast for this year has shrunk from a 60,000 tonne surplus to a 42,000 tonne surplus, while only two out of 12 analysts offering a view expect anything other than a deficit market next year. The median expectation is for a 99,000 tonne deficit. Back in January it was for a 19,500 tonne surplus.
Stocks of nickel are still high and creeping higher, but now they are now viewed not as oppressive weight but as brake on a move to a supply shortfall, as China’s NPI production contracts due to a shortage of feed.
Zinc, which had been expected to be the star performer back in January, has largely met expectations so far this year, even if it has been eclipsed by nickel.
The LME cash price averaged $2,051 per tonne in the first half of this year, just one dollar off the January median expectation of $2,050.
The market’s continued strong performance has caused analysts collectively to tweak higher their expectations.
The median forecast is now for prices to average $2,116 per tonne this year and $2,250 next year, the latter representing a $50 gain on the January median.
As with nickel, this is a supply story, namely the closure of some of the world’s largest mines as they reach the end of their natural lives.
The expected timeline for a shift to market deficit has accelerated since January, the median forecast for 2014 switching sharply from a 96,000 tonne surplus to 80,000 tonne deficit. That for next year has similarly changed from a 17,500 tonne surplus to a 172,500 tonne deficit.
In all probability this shift in collective stance reflects the steady drawdown in LME stocks and the continued flow of zinc to China, even though both bullish signals come with plenty of caveats.
Sister metal lead lacks any such signal, even though it will be impacted by the same mine closures expected to tighten the zinc market. LME stocks are largely static, and China remains a net exporter of refined lead.
Which maybe explains why analysts have been trimming their price forecasts. The heavy metal has fallen from second to fourth in terms of bullish expectations since January.
Since the early-2014 poll, median forecasts have been adjusted downwards by 3 percent for this year to $2,159 per tonne and by 4 percent for next to $2,300 per tonne.
Two forecasts that haven’t changed much over the last six months are those for copper and aluminium.
Copper remains out of favour with analysts, who evidently are struggling to see much price upside at a time of resurgent mine supply. It is still the only metal for which the median expectation is for lower prices both this year and next relative to 2013.
LME stocks may be hovering near historical lows, but the consensus view appears to be that this reflects no more than the temporary flip side of high inventory in China.
Only two of 14 analysts submitting a view on market balance, Bank of America and Morgan Stanley, expect anything other than surplus this year. Only two out of 13, Credit Suisse and Morgan Stanley again, expect anything different next year either.
Aluminium remains equally out of favour, with analysts seemingly taking a sceptical view of the recent LME price strength.
It is the only other metal expected to fall in price this year relative to last, to the tune of 1 percent, even though the median assessment of market surplus has shrunk from 568,400 tonnes to 235,500 tonnes.
Next year is different with seven out of 13 analysts forecasting a market deficit.
That hasn’t translated, though, into expectations of higher prices. The median forecast for next year also has actually fallen by 1 percent to $1,963 per tonne.
The collective betting seems to be that historical inventory is still likely to act as a powerful brake on price and that even if aluminium does surprise on the upside, there is plenty of idled production capacity that can swing back into action.
But then again, the collective betting can sometimes be wrong, as starkly revealed by events in the nickel market at the start of this year. (editing by Jane Baird)