London 03/08/2016 - Global copper production is better than expected this year, the Chinese aluminium market is entering a corrective phase and nickel shipments from elsewhere will offset even the most dramatic estimates of decline in the Philippines, JP Morgan said in a note.
On copper, the bank upgraded its estimate of 2016 production to 20,251,000 tonnes, an increase of 1.6 percent on its November 2015 estimate.
The absence of significant labour disputes, a lack of inclement weather and the fact that several large mines exceeded their production guidance for the year attributed to the strong production levels, it added.
JP Morgan also trimmed its estimate of 660,000 tonnes of production cuts for 2016 to 550,000 tonnes - a higher copper price combined with lower costs have resulted in improving margins, incentivising production, it said.
LME three-month copper has risen around six percent since the start of this year and was last at $4,872 per tonne.
In aluminium, the bank noted signs that the Chinese aluminium market is starting to correct. Domestic prices have slipped five percent in the last two weeks, pulling LME prices down 5.4 percent. The SHFE backwardation has also eased to just above 200 yuan per tonne in July from more than 400 yuan.
The reason for the turnover seems to be demand- rather than supply-driven - concerns about demand prospects in the second half of the year are growing, it added.
Orders from the construction sector have been easing since the start of July and demand from the air conditioner sector has been very weak - the production rates have declined by almost seven percent in the year to date.
Adverse weather in northern China is also having a negative impact on demand. Operating levels at fabricators in the affected areas have been declining and some small manufacturers have been forced to shut their facilities.
"We believe developments in the Chinese aluminium market will ultimately determine the path of the LME price," it said.
LME three-month aluminium was last at $1,644 per tonne, 12 percent up since the start of this year.
On nickel, JP Morgan calculated that an assumed 50-percent drop in Chinese ore exports from the Philippines - an unrealistically steep drop, in its opinion - because of increased regulation, would amount to a loss of around 100,000 tonnes in contained nickel volumes this year.
Increased shipments from Indonesia, Myanmar and New Caledonia this year will probably amount to slightly more than 100,000 tonnes of contained nickel, fully offsetting even the most dramatic estimates of a decline in Philippines exports.
As well, the bank estimated total nickel supply in China increased 37 percent in the first five months of the year, boosting Chinese nickel surpluses.
On the demand side, it noted "signs that Chinese nickel demand have started to weaken". The Chinese stainless steel sector - the main nickel consumer - has entered the seasonally slow third quarter, with some mills shutting for maintenance. Buying interest has also softened in China on the worsening negative LME-SHFE arbitrage.
In zinc, JP Morgan sees the potential for modest intermittent downside over the coming month amid seasonally weaker demand compounded by slower trading and the possibility of some profit-taking.
But a dramatic retracement in price is unlikely due to strong investor interest and the consensus view of refined tightness emerging in the next six-12 months although the current prices still look slightly ahead of actual physical refined fundamentals, it added.
"Zinc's fundamentals continue to catch up but aren't at the fever pitch embedded in the price," the bank said.
LME three-month zinc was last at $2,276 per tonne, up 47 percent from $1,553 at the start of 2016.
(Editing by Mark Shaw)