London 19/01/2016 - The outlook for base metals for this year remains weak while the global economy continues to struggle, Sucden Financial said.
The same themes that weighed on markets in 2015 will persist in 2016, with China continuing to slow and confidence faltering amid weak inflation, soft energy prices and monetary policy diverging in key economies, the broker said in a quarterly report on Tuesday prepared in conjunction with FastMarkets.
"Although metals prices appeared to bottom out last year after several key producers announced output cuts, markets are transfixed on the weak demand outlook," it said. "Further downside in metal prices would delay the recovery that had been expected this year. Still, tighter supply could eventually turn sentiment around."
For aluminium, it forecasts a first-quarter price range of $1,430-1,560 per tonne and for 2016 as a whole an average price of $1,500. Three-month aluminium recently traded at $1,494.50 per tonne on the LME, up $14.50 on Monday's close.
"There have been numerous output cuts, mainly in China, although Alcoa has also slashed around 810,000 tonnes since March 2015," it said.
Although further cuts and delays to ramp-ups are in the offing, " given a wide producer base and with governments keen not to see unemployment rise, we feel the industry will not be disciplined enough to make and stick to enough cuts to create the large supply deficit that is needed to rid the market of the stock burden", it added.
In copper, producer cuts are now being seen, which have added to other supply disruptions and which should help balance supply and demand, Sucden said. But the weak demand outlook for emerging markets has hijacked sentiment, which is what investors are looking at.
"While output cuts may be able to turn the market round - we think they will - it would be a lot easier if the outlook for demand recovered, which we think will happen later in 2016," Sucden said.
Bearing in mind the Chinese New Year, Sucden expects prices to languish for now, supported around $4,200 but recovering towards $5,000 later. For the year as a whole, it expects an average of $5,000. The metal recently traded at $4,430 per tonne, up $53.
As for lead, with primary supply now affected by mine closures and output cuts and with secondary supply generally price-elastic, the broker expects refined metal supply to tighten to the extent that, even with demand weak, the supply/demand balance will show supply deficits in 2015- 2017.
Given low LME and SHFE stocks, lead prices could well be one of the stronger performers in 2016, it said. The broker expects prices to average $1,800 in 2016 and to range between $1,600 and 1,830 in the first quarter. It was last at $1,633, up $27.
Nickel prices dropped below their 2008 low to $8,145 per tonne in November, a level last seen in 2003. At these levels, two-thirds of global nickel capacity is believed to be loss-making so it seems inevitable that prices will have to rebound before long or output cuts should force the market's hand, Sucden said.
Short-selling in China and broad-based destocking due to falling nickel prices have led to an extremely oversold market, it said.
"Stocks are high but even so there is considerable risk on the upside from short-covering and production cuts," it added.
The broker expects a first-quarter price range of $8,100-10,700 and an average price of $10,500 this year. It recently traded at $8,690, up $100.
For zinc, with output cuts and mine closures in progress, the supply side looks set to tighten considerably - once the downside outlook becomes limited, short-covering alone is likely to be enough to lift prices considerably, Sucden said.
The broker expects a price range of $1,450/1520-1,700 in the first quarter and an average price for 2016 of $1,750. It was last at $1,515.50, up $19.50.
Finally, after a slow start for tin, prices are likely to be supported around $13,000, with possible increases later in the first quarter. Strong resistance is expected at $15,600. For 2016 as a whole it sees prices averaging $15,750. The metal was last at $13,295, down $30.
(Editing by Mark Shaw)