Quarterly Metals Report Q4 October 2013

Analysis & forecasts for Base & Precious Metals, Iron Ore & Steel
Contents Summary Economic Overview Metal Market Overview Precious Metals Aluminium Copper Lead Nickel Tin Zinc Steel Iron Ore 2 3 6 9 20 27 33 38 43 48 53 57

Compiled and Published by Sucden Financial Limited Metals Comments/Analysis: William Adams, Head of Research, FastMarkets.com Steve Hardcastle, Head of Client Services, Sucden Financial Limited

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Quarterly Metals Report

Summary
October 2013

Summary
Gold
Range $1,270 – 1,350 with possible higher prices, contingent on debt ceiling negotiations.

Silver
Solid fundamentals supportive, but expect producer selling above $25. Range $20-25.

Platinum
Well supported at $1,280 marginal cost area. Upside limited to $1,650.

Palladium
Wide range anticipated, well supported at $600. Possible spike to $850.

Aluminium
Supported at marginal cost level of $1,750, dependent on premium movements but stock overhang may hinder any increases above $2,100.

Copper
Balanced to small surplus for fundamentals, but supported by financing deals. Range likely to be $7,000 – $7,500 with an average of $7,250.

Lead
Holding up well, with supply deficit anticipated shortly. Supported at $2,050 with initial target $2,250.

Nickel
Supply/demand balance deteriorating, but bearish outlook clouded by Indonesia. Anticipated range of $13,800 – 15,000.

Tin
Balanced fundamentals but rangebound by Indonesian announcements, discouraging price increases above $25,000. Anticipated range of $22,000 – $25,000.

Zinc
Supply surplus availability held in check by stock financing but with little upside incentive. Expected range of $1,800 – 2,050.

Steel
Well – to-oversupplied with capability of matching increased demand from stocks and higher existing capacity utilisation. Fairly tight range for HRC with average $640 anticipated.

Iron Ore
Subdued following supply increases alongside weaker steel consumption will lead to tighter ranges. Anticipate support at $120 and resistance at $138 for this quarter

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Quarterly Metals Report

Economic Overview
October 2013

Economic Overview
Our outlook for global growth has two themes: mixed engines of growth in the global economy and politics versus the economic fundamentals. Economic growth in the world has been largely stable at a relatively low level over the past three years, despite various economic headwinds and regional shifts in economic growth. Some emerging economies have moved from being the drivers of growth to becoming the laggards over this time while some of the more lacklustre developed economies have returned to positions of influence.

Macroeconomic outlook
Markets have had to contend with several changes to regional economic outlooks over the third quarter when politics and central bank politicisation drove markets and economic recoveries. Europe continued to drag on economic growth; while there is insufficient evidence to suggest a change in this outlook over the third quarter, the fourth quarter may be slightly more positive. In the US, stronger economic fundamentals, working credit channels and hefty support for the housing market had given the impression that it was ready to start to wean itself off quantitative easing (QE). But the consideration of life after QE may have been enough to send US 10-year swap rates to 3.0 percent from 1.8 percent, closing the gap between nominal growth rates and (long-term) nominal interest rates, suggesting that monetary policy is now significantly less effective a stimulant than it was. This comes against a backdrop of extreme political polarisation. In China, fears of a hard landing were averted by astute government policy driving a bounce in third-quarter GDP. Still, improvements in monthly data must be read in the context of last year's softer summer. In other emerging markets, the most pertinent reaction to Federal Reserve policy guidance over the past six months was the flight of capital, forcing the implementation of higher interest rates in many developed economies, following the US central bank's indication that it was looking to taper its QE programme from the second half. Meanwhile, major exportdriven economies, such as Germany and South Korea, had to compete with a resurgence in competiveness from Japan thanks to Abenomics.

China
With China's third-quarter GDP growth having rebounded to 7.8 percent from 7.5 percent in Q2, the country's new leadership seems well placed to embark on the next phase of economic reform and rebalancing following several turbulent quarters. A growth range of 6.5-8.0 percent would seem to be the new normal now that the new authorities have started to curb the credit binge and with the stimulus packages of 2009 and 2012 having faded. Recent days have shown that the Chinese authorities are keen to subside the bout of house price inflation, making hawkish comments about interest rates and availability of funding, and dampening sentiment. In exchange for accepting lower growth, Premier Li Keqiang will be allowed to pursue a cautious, yet simultaneously ambitious plan to liberalise certain parts of the financial system, such as the yuan, to increase China's global economic and financial influence. The Third Plenum of the 18th Chinese Communist Party Central Committee in November will tell us more. While usually focused on the economy, this Plenum may be a mixture of economic reform and environmental protection reform, allowing it to deal with some economic issues, such as overcapacity in energy-intensive industries, through the prism of environmentalism. Two areas that will be central to the government's announcement will be the reform of the financial system, in particular the shadow banking system and currency liberalisation, and industrial overcapacity. The clampdown on overcapacity and financial sector reform would both have a major impact on metals markets.

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3 percent.3 percent in 2013 from 6. A resolution seems far off and the issue is more likely than not to flare up again in 2014.7 percent and is on course for the target of 2.0 percent in 18 months . GDP growth excluding the effects of sequestration was closer to 3. Lower long-term interest rates increased access to mortgages. sequential economic data from China points to another moderate slowdown.which has buoyed growth. with the Chinese currency hitting a 20-year high against the dollar and Chinese officials’ willingness to comment on the record on US internal politics.7 percent in 2012. the German election has paralysed the EU political process and we expect volatility to return once a coalition has been formed. But core CPI remains at -0. There is a sizable gap between the headline and core rate.6-2. deficit reduction targets have been relaxed.1 per cent. We forecast US growth of 1. fuelling a 19 percent rise in house prices since the March 2012 low. EU growth is more likely to remain anaemic rather than negative into 2014 after Brussels recognised that fiscal austerity can only produce growth if carried out alongside structural reform. The US QE3 clearly drove the US recovery in 2013.0 percent in the coming quarters.6 percent over the full year.8 percent in 2013 and think the US current account deficit will fall to 4. the result of a lack of demand and by major banks continuing to deleverage.0 percent. Aside from housing. But this positive feedback loop forced the Fed to start the QE tapering conversation in June. While some have Page | 4 . This issue is likely to remain a source of significant uncertainty until well into the New Year and again suggests that QE tapering will be kicked down the road.Quarterly Metals Report Economic Overview October 2013 The recent political upheaval in Washington could prove the catalyst for faster liberalisation of the yuan. Headline inflation has shot higher . Japan The Japanese economy continues to improve at a steady rate. which can mostly be explained by the surge in the cost of oil and other raw material imports owing to the depreciation of the yen. which should aid growth. well below the Fed's present forecast. While the recent political calm seems positive.it is now at 0. Europe The EU finally rebounded in the second quarter.8 percent. We foresee flat growth and potential for flashpoints while unemployment rates exceed 20 percent in some eurozone countries. The ECB is likely to enact another LTRO process to offset the horrendously low loan and money supply data. which in turn took some positive momentum out of the housing market over the summer. Ultimately. Sequestration caused a fiscal drag of about 1. We expect this fiscal drag to lessen next year and growth to strengthen gently to 2. the major risk for the US over the next six months is the deferral of capex decisions and releveraging by major corporations until they have more clarity over the debt ceiling. in the absence of major structural reform.5 percent in 2013. the US economy appears to be founded on solid fundamentals. We would define our balanced outlook for the next three months as "political uncertainty versus a firmer economic footing". improving consumer spending and confidence. Finally. recording GDP growth of 0. Despite the improving underlying fundamentals. This rise in prices boosted new home sales and construction and lowered the proportion of houses in negative equity. thus increasing access to credit. with the Chinese economy moving back towards growth of 7. but it remains on course to contract at a rate of -0. Why? The EU is no closer to a banking union so financial fragmentation remains a problem.

Quarterly Metals Report Economic Overview October 2013 seen this is a shortcoming in Abenomics. lower prices should force producers' hands. But the Fed's hesitation over tapering and an unexpected relative improvement in the Chinese economy since the middle of the quarter supported prices. Page | 5 . the credit crunch in China and rapid movement in US real rates suggested that base metals and precious metals could both remain in trouble for the rest of the quarter. On balance we are looking for global economic growth to continue to heal but at a glacial pace. to achieve this. with many of the base metals prices now back into or around their marginal cost curves. we believe that higher import prices from a depreciating yen are part of the first phase and that this should feed through into a higher core inflation rate at a later date via higher wages. Global Outlook At the start of the third quarter. Overall. which is now being pulled out and reinvested in the US. All of the above and the countdown to the US debt ceiling expiry kept metal markets relatively rangebound and many investors. There may well be some downward spikes but. This is a theme that we suspect will continue to play out in 2014. We forecast GDP growth of 2. But this is not without risks. increasing headline inflation and supporting Japan’ s export-driven economy. A higher sustainable inflation rate of 2. But Japan is already running a current account deficit of more than 10 percent. We therefore expect base metals to remain rangebound higher prices will encourage producer hedging and lower prices will encourage producer cuts and bargain hunting.0 per cent in 2013. we believe that the Bank of Japan (BoJ) will need to increase the size of its balance sheet again to weaken the yen by another 20 percent. with different regions taking varying responsibility for driving growth. especially given the reaction in other emerging markets with sizeable appetites for raw materials to possible QE tapering. while the BoJ’s balance sheet continues to expand rapidly and the country's debt -to-GDP ratio far exceeds 200 percent. Bullion should be buffeted by physical demand from emerging markets at lower prices and downward pressure associated with higher US real rate. who had had their fingers burned earlier in the year. sat on the side-lines or rotated back into equities where the positive effects of QE3 were still being felt.0 percent cannot be achieved without commensurate growth. policymakers across the globe have shown they will do whatever it takes to avoid triggering more crises while often generating new long-term issues. One example is of the abundant liquidity put to use in emerging markets in the past couple of years.

Subsequently. leaving them vulnerable to another down leg. Looking ahead. when these rallies faded. The metals have been less reliant on the dollar. This had come about because the financial environment and the structure of the market have enabled metal to be profitably held off market in cash-and-carry deals. retracing more than 61. b ut less liquidity and the LME’s determination to cut large exit queues at registered warehouses may start to change this. zinc and lead enjoyed more protracted rallies into August and early September before returning to their summer ranges. These potential changes come while some of the formerly tighter metals. in effect keeping supply tight enough to underpin prices and premiums. while aluminium. in particularly the role of fundamentals in each metal's price performance. in the case of many of the metals. the LMEX came off aggressively. Again we wonder whether this is the kind of environment that will finally Page | 6 . such as copper. Fundamentals largely bearish The fundamentals for the base metals. Current situation One of the most important trends has been the noticeable shift in drivers and correlations for base metals over the summer. This has had the effect of reducing availability. albeit below last summer's lows. with the exception of tin and possibly lead. Copper and nickel have both been relatively rangebound over the past two months. base metals formed a decent base over the summer. as the correlation between the dollar index and the LMEX shows (see chart). the metals were constrained through September and into October despite a continued fall in the dollar index. But the short covering rallies in base metals rather than the dollar were the more dominant force.8 percent of the sell-off from the January 2013 highs to 2013 lows. This summer’s base coincided with a three-year high for the US dollar index. remain bearish in that supply surpluses continue and. falling to three-year lows.Quarterly Metals Report Metal Market Overview October 2013 Metal Market Overview Recap Since our last report. macroeconomic issues and liquidity. are moving into structural surpluses for the first time in a decade. the laws of supply and demand have been flouted over the last couple of years. Tin has been the standout performer. the fundamentals of each metal in conjunction with changes to warehousing rules will have an increasing role on their price performance while investors again consider life after this liquiditydrunk world.

partisan Page | 7 . including the SRB. traders. diluting the effects of the cuts.the past three months have felt like suspended animation as a confluence of drivers have left the marketplace looking like a deer in headlights.will occur at a time of increasing structural surpluses and when new warehousing regulations could increase the supply of available metal and perhaps as a stronger dollar emerges after the first quarter. Marginal costs of production and production cuts Other than copper and lead.we think it likely after the next raising of the debt ceiling . the eventual onset of QE tapering . But the continued devaluation of the yen. where metals face an oversupply situation. Whether the trend remains intact is less open to debate than it was three months ago . Some aluminium and nickel producers have promised to stem output but not at sufficient levels to create supply deficits or erode large stock overhangs. For a long time. There is a danger that prices will have to fall even further to trigger sufficient cuts to create the supply shortfalls that are needed to rebalance the markets . metals prices are close to or below their marginal costs of production but there have been few announcements of major cuts so far.the new owners of the LME will be keen to move out of the political spotlight. Even where cuts are being made. A dangerous set-up We have in the past viewed the build-up of inventory and the breakdown of negative feedback loops that would normally prompt production cuts as a dangerous aberration and one that could unfold in a disorderly manner. thereby avoiding a meaningful price correction . The key events in the process will be the release of the new warehousing rules and the start of QE tapering in 2014. Increased political polarisation suggests that dollar rally might be capped as major dollar investors look to diversify into other currencies and maybe even some gold. producers. banks and warehouse operators have managed to keep a grip on availability. the dollar is likely to climb in 2014.one that prompts sufficient production cuts to rebalance the markets. teething problems over a banking union might make the currency less attractive later in the year. triggering widespread production cuts. We would expect another downward spiral in prices to force the output cuts needed to attract longer-term investment buying and we would expect astute Chinese traders. Lower prices look likely but they may turn into spikes Our general view of the metals has changed little since our last report . Prices should generally remain rangebound with a downward bias until cuts have brought the market back into balance.a theme that we suspect could play in out in 2014. There is evidence of this in aluminium where physical demand has indeed fallen recently because consumers hope that purchases down the line will have reduced premiums. to take advantage of lower prices. we would expect producers to watch for hedging opportunities into price rallies. Still. new lower-cost capacity is being brought on stream. Conversely.Quarterly Metals Report Metal Market Overview October 2013 force an unravelling of the status quo. which is likely to keep most of the metals capped at least until sufficient cuts have been implemented. But the extent of the political divide in Washington makes us wonder who will replace the Fed as the largest buyer of newly issued T-bills after the recent chaos. we think. Dollar has mixed outlook As confidence in the US economy grows and the Fed starts to rein in QE. Euro – expecting volatility The present calm within the euro political system and the green shoots of growth point to a strong euro into 2014. While we agree that the euro should remain well supported into the first quarter.

oversupply and high stock levels in most of the metals need to be addressed.have moved in opposite directions over the last three months. The JPM global PMI (not on chart). China’s slower -than-expected recovery and the harder stance that government has adopted alongside the fallout from QE tapering now look set to keep metal prices under pressure. our general conclusion is that the metals are likely to remain rangebound .Quarterly Metals Report Metal Market Overview October 2013 politics in Washington and the ECB’s sterner line on monetary financing should keep the euro relatively well supported. we feel it will take weaker prices to bring that about. which takes into account the more recent negative effects of EM manufacturing output. the Chinese and European PMIs are above 50 but are weak. the divergence in the US ISM manufacturing PMI and the US manufacturing PMI .the upside is likely to be capped by producer hedge selling and the downside. by bargain hunting and production cuts in response to lower prices. Earlier this year. As the previous chart shows. Still. We see the EUR/USD generally in a range of 1. PMI data generally supportive The global manufacturing outlook remained mixed over the past nine months but. we thought prices would trade in a sideways-to-higher range as consumers switched from destocking to hand-to-mouth buying and possibly to restocking later in the year. However. as of three months ago. Which trend proves to be correct will be very important to the outlook for global economic sentiment. all four of the major PMIs we follow moved above the all-important line dividing contraction from expansion. the US ISM is strong and the Japanese PMI is trending higher. Page | 8 . has also recently started to trend higher after a lacklustre summer. Further price weakness would come as no surprise. although downward spikes may be seen.3200-1. with possible spikes upwards. This all points to a marginal yet positive manufacturing outlook while also acting as a reminder of how disappointing real output remains across the globe in the aftermath of the great recession. Outlook far from bullish On balance.3750. Although we are optimistic that better times lie down the road. we have become less optimistic for metals prices as 2013 has progressed but we have also had to push this bearish view back because of the delay to QE tapering and also the temporary boost to Chinese economic growth as a result of its leadership's support for the domestic economy. especially while most are in a supply surplus and insufficient cuts to output have been made.

Prices peaked late in August but turned lower when Russian and Western leaders reached a deal over Syria’s chemical weapon stocks. While its decision not to taper caught markets wrong-footed and prompted a brief bounce in gold. Gold traded just shy of $1.Quarterly Metals Report Precious Metals October 2013 Precious Metals Gold Introduction Following the volatile sell-off in the second quarter.oil prices rallied. with large volumes of metal continuing to flow to physical markets in Asia and the Middle East at the start of the period. Additional pressure emerged ahead of the September FOMC meeting. Premiums Page | 9 .434 per ounce in response to reports that Syrian forces had used chemical weapons in a suburb outside Damascus. with WTI crude trading above $110 per barrel for the first time in more than a year. initial rallies early in the third quarter drew further selling from stale institutional investors as well as fund players. The gains came from both safe-haven and anti-inflationary hedges . The selling abated in mid-July when oversold technical indicators and heightened geopolitical tensions amid escalating rhetoric from Western leaders towards Syria prompted a rebound. The robust physical buying peaked in the second quarter because of the price correction. the overall trend remained lower investors continued to liquidate in search of higher-yielding assets but also to bolster cash positions against a potential US sovereign default.

In addition. While rates have since eased. The backwardation that emerged at the end of June remained in place across most of the third quarter.9 tonnes of this total was related to the Turkish policy of accepting gold in its reserve requirements from commercial banks Gold closed the quarter around $1. particularly in light of the substantial price weakness that emerged in April.600 and subsequently to $1. which marked a key profit level for ETF investors. according to IMF figures. prompting a continued shift away from gold and towards higher-yielding assets. and debt levels globally remain elevated and pose a threat to inflation and currency debasement. Still. Looking into 2014. Overall.750 to $1. with Greece facing a further multi-billion euro shortfall. The shift for higher yields will see institutional investors shy away from gold but we expect individual and retail investment demand to remain steady.500 range and averaging $1. down 15 percent from the 2012 average of $1. Summary of outlook We have made several downward price revisions over the year. Current situation Gold has made a choppy start to the fourth quarter. Dip-buying has again been evident but expectations of a debt deal in the US and the nomination of Janet Yellen as the next chair of the Federal Reserve seems to have prompted further liquidation by ETF investors. adding a net 75. emerging market growth may continue to falter.329. We expect Chinese demand to grow in particular. gold should maintain a downward bias as the global economic recovery gathers pace. with physical demand jewellery. hitting lifetime peaks in the rupee. hurdles remain. initially dipping back below $1. we see gold trading within a broad $1.Quarterly Metals Report Precious Metals October 2013 remained elevated but demand slowed as prices recovered and the market entered a seasonal low point for physical demand.280. We lowered our initial forecast of $1.420 this year.300. the federal shutdown in the US and the knock-on macroeconomic implications have seen FOMC tapering expectations shift further out. the Indian g overnment further increased import duties to reduce the nation’s current account deficit. In addition. coins and bar .92. We maintain our view that gold will average $1. Central banks remained net buyers during the period. US politicians have only succeeded in kicking the debt can down the road and have yet to tackle the underlying issues.100-1.000 tonnes.668.480. nearby prompts remain tight. Much of this was attributed to London good delivery metal being returned to refiners to be recast into kilo.to run close to 1. Page | 10 .7 tonnes of metal in July-August.420 after the breach of $1.3 percent. teal and tola bars favoured in the Asian markets. although 45. the recovery in Europe remains fragile. while sharp falls in emerging market currencies saw local gold prices surge. which still have the potential to encourage investment into gold as a means of diversification. up 7.

8 tonnes) by the end of the quarter while the ratio of longs to shorts has widened to 1.557 lots (51. selling as gold recovered back towards $1. US investors in the SPDR fund continued to reduce their exposure.open shorts were more than halved from the end-June level to the end-August low.18. The NLFP stood at just 16.139 lots (208. But open interest remains down on levels at the start of the year. By contrast. reflecting a lack of conviction from both bulls and bears. But as prices recovered.5 tonnes).92 from 1. which continued the shift towards higheryielding assets.1 tonnes of metal in the Zurcher Kantonal Bank fund.Quarterly Metals Report Precious Metals October 2013 Fund activity The net long fund position (NLFP) declined initially . That said. Net gold holdings declined 5.the price pressure at the start of July extended the trend of long liquidation and short selling among Comex funds. the lowest since February 2005. leading to a further 103.1 percent while net Page | 11 . who added 5.350. ETF investment activity In contrast to the aggressive investor liquidation carried out during the second quarter the pace of liquidation over the July-September quarter was far more modest. funds began to cover their short exposure . net holdings across the various ETF platforms we monitor continued to decline in anticipation the Federal Reserve would being to taper its quantitative easing programme.289 lots (243. Pockets of buying were seen across the various funds over the remainder of the quarter but liquidation outweighed fresh investment.5 tonnes) in the week of July 9.7-tonne reduction in net holdings to their lowest since May 2010. which corresponds to the peak in the NLFP of 78.200 early in July drew an influx of buying from Swiss investors. The initial test back towards $1. The NLFP totalled 67.

Demand from these sectors was 1. In addition the linking of imports to exports levels and the confusion this created also hurt gold demand. prompting strong rhetoric from Western political leaders. building on the phenomenal demand in the second quarter. raising $261 million . with sabre-rattling between the two lifting oil above $110 per barrel for the first time in 18 months. gold is likely to find further background support as the market enters what is traditionally the strongest period for physical demand with a host of auspicious dates for Hindus between November 13 and December 11. Physical interest Demand for physical gold.in their initial funding. the rebuilding of stocks. Demand fell off as the quarter progressed.Quarterly Metals Report Precious Metals October 2013 silver holdings increased 5. In addition. The Indian duty increases pushed premiums away from their recent peak and briefly into a discount. reflecting steadier price sentiment. with physical premiums into China still elevated in an environment of strong imports (from Hong Kong. according to the China Gold Association). with a draft budget from Greece suggesting the economy could emerge from a six-year recession Page | 12 .2-tonnes . though.particularly the rupee and the rupiah. according to the World Gold Council. with President Obama calling on Congress to vote in favour of military action. though.5 percent in the first seven months of the year. the launch of the first physically backed ETFs in China failed to tempt significant investment interest. Having surged in the prior quarter. we suspect demand will increase as confidence in products improves over time. Syria's subsequent agreement to place its chemical weapon stocks in UN hands saw oil and gold turn lower as safe-haven positions were unwound. premiums eased back to more normal levels in areas such as Hong Kong and Singapore. Russia clashed with the US over the legality of military intervention. while silver investors tend to be smaller retail-level/individual investors. mixed economic signals emerged. both for jewellery and investment (coin/bar) purposes. Official intervention was another factor .31 tonnes in the three months ended June 30. Despite the RBI's efforts. just over half the targeted $400 million. Chinese data and anecdotal indicators suggested the economy exited its recent dull patch and European numbers also pointed towards stronger manufacturing and service activity over the period. these rose 130 percent over the first eight months of the year) and surging domestic production (up 11.the Reserve Bank of India made further efforts to temper gold imports. Rates for Shanghai remained elevated. offsetting slower demand from the sub-continent. Still.0 percent. reflecting consistent demand. Meanwhile. The big-picture view Geopolitical tensions escalated during the quarter after the use of chemical weapons on civilians in the Syrian conflict.equivalent to 6.37 tonnes between July 1 and September 25 compared with 335. Interestingly. primarily the NYSE-listed SPDR. remained strong at the start of the quarter. The Indian finance ministry reported gold imports of 58.083 tonnes. The government raised import duties for all gold forms to 10 percent from 8 percent in August and further raised the duty for jewellery imports to 15 percent in September. Chinese gold consumption is well on its way to surpassing India. which continues to reflect the exposure of institutional investors to gold funds. slower seasonal demand and weakness in emerging market currencies . This reflects investor appetite for physical metal but also the relative immaturity of the derivatives market in China.

Turbulence in emerging market currencies together with US debt troubles could prompt further diversification into gold. The bigger issue that emerged at the end of the third quarter and has dominated sentiment early in the fourth has been the US debt ceiling .270-1. with Germany opposing proposals to centralise control of failing lenders. In addition.Quarterly Metals Report Precious Metals October 2013 in 2014. Gold in the Indian Rupee peaked at a record 98. since the underlying issues remain. leading to lower supplies further down the road.709. However. The deal will extend the Treasury's borrowing authority until 7 February and fund the government to January 15. The decision not to taper came as a surprise and saw risk sentiment pared back. we suspect retail/individual investors could favour gold again as a debasement/diversification hedge. Brazil.negotiations between Republicans and Democrats over this topic and the 2013-2014 budget took 16 days to resolve. The agreement to raise the US debt ceiling has allowed gold to recover. Speculation surrounding the Federal Reserve’s asset purchase programme intensified during the period .350 range across the remainder of the year. it should hold within a $1. Turkey and Indonesia. which had a dramatic impact on locally denominated gold prices. gaining 13. Conclusion The stalemate in US debt negotiations saw gold slip lower amid further investor and fund liquidation. solid physical demand from Asia and central bank diversification are all supportive for the medium and longer terms. leading the DJIA to fall more than 500 points from a record 15. While this has again led some to question the yellow metal's role as a safe-haven asset.6 points. we feel gold is merely fulfilling the role of providing liquidity in times of duress as well as acting as a proxy to the dollar. While institutional investors have turned away from gold. The currency impact Of particular note during the period were currency fluctuations in emerging markets such as India. Page | 13 . several producers such as AgnicoEagle Mines and IAM Gold have announced capex spending reductions. But a rift emerged between Germany and the ECB over banking oversight.6 percent in dollar gold. the deal will only raise the ceiling until early February and.markets increasingly priced in an announcement of tapering at the September FOMC meeting. but will only be another stopgap measure.3 percent across the quarter compared with 7.840 rupees per ounce late in August.

despite solid physical and ETF investment demand.60 across the month.21 into July but. establishing a base midmonth around $21. But the ratio fell sharply lower across August to below 57 from 65 when silver rallied amid fund short-covering and solid investment demand. Trade so far in the fourth quarter has been choppy although the metal remains above $20. the metal struggled to hold above $20. possibly producer-related. it’s highest in almost three years after silver underperformed gold’s initial correction higher.5 percent on the start of the year .50.Quarterly Metals Report Precious Metals October 2013 Silver Introduction Silver recovered from its end-June low of $18. leading the metal to a peak of $25. capped by resistance so far at $22. Current situation Silver ended September with a 10. peaking at 67.12 Strong resistance.4:1. prevented further gains. Silver finally found upside momentum during August when robust investment demand was joined by fund short covering. silver gradually lost ground on speculation surrounding the FOMC meeting and a possible start to the tapering of quantitative easing. Gold/silver ratio The AU/AG ratio initially tracked higher in July.3 percent gain although it was down 28.25. trading broadly between $18.the largest decline among the precious metals.71 and $20. Page | 14 .

Silver coin sales under the US Mint Eagle programme ran some 32 percent higher on last year while gold sales were down 45 percent. despite a slight reduction during September. But the increase came from short covering . enjoyed their largest quarterly increase since the fourth quarter of 2010. Solar panel demand. As of late September. will remain a feature . adding 17. suggesting funds maintain a bullish stance although fund players will continue to act as a swing factor. Fund activity The fund net long position (NFLP) rose from an end-June low of just 837 contracts to a peak of 18. After the sizeable redemptions during the second quarter. Investment interest for coins and bars compared to gold were also notable.834 contracts in early September. India imports stood at 4. as reflected by the shift lower in the AU/AG ratio.Quarterly Metals Report Precious Metals October 2013 The ratio has since risen back to 60:1. will offset weaker European demand while austerity forces governments to remove subsidies. the ratio stood at 1. Demand from green initiatives will also absorb metal.4 million ounces during August and.open funds dropped by more than half between the end of June and early September.02. particularly from Asia.strong demand from China and Japan. Meanwhile. The strong pace continued during August and was in part responsible for silver's outperformance of gold. finding good levels of support from investors as well as improving demand from the electronics and battery sectors. Net holdings increased a further 14.5 million ounces.921 tonnes for the whole of 2012.2 from a low of just 1. investors took advantage of the price correction to post the largest monthly net inflow in two years during July.073 tonnes in the first eight months of the year compared with 1. following the closure of its remaining nuclear power stations. ETF/Investment Activity Investment interest via silver ETF platforms proved far more robust compared with gold.8. Physical demand from India is also notably stronger while record prices and tax hikes on gold lead to substitution demand. The long/short ratio increased to 2. trade data suggests India’s interest in silver has been aroused this year owing to record gold prices and the surge in import duties. Page | 15 . Summary of outlook for 2014 Silver has been forming a base around $20 following the second-quarter correction. which we still see as fair value given that the 20-year rolling average lies around 60-65:1.

Still. silver is therefore likely to hold a broad $16. Conclusion Solid demand from numerous industrial sources and photovoltaic panels will remain a strong demand stream. A similar scale of liquidation could see as much as 2.500 tonnes of silver flood back into the market.50-26. mine production will continue to expand while the selling that emerged towards the $25 level suggests producers may act as a price cap. Page | 16 . reducing capex expenditure and potentially leading to some production closure from unprofitable facilities. which so far this year have increased 3. The weaker price sentiment that has emerged in silver as well as by/co-products such as zinc and lead is also supportive. will probably remain a swing factor for prices. which has also been supportive this year. reflecting the exposure of institutional investors to gold compared with smaller retail/individual investors to silver. .Quarterly Metals Report Precious Metals October 2013 Investment demand. Gold ETF holdings have succumbed to heavy pressure this year while silver holdings have increased.00 range in the year ahead. The threat for silver remains the scale of ETF holdings.3 percent while gold holdings have declined.

Quarterly Metals Report

Precious Metals
October 2013

PGMs
Introduction
The PGMs broadly tracked the underlying moves seen across the precious metal complex. Platinum recovered to $1,450 by the end of July from an early July low around $1,310. The white metal posted a one-day rally of $60 on August 8 on technical and fundamental drivers, extending to a peak of $1,555 late in August. September was dominated by trade and fund selling - overall metal sentiment weakened.

Palladium moved largely in tandem with sister metal platinum. In relative terms, however, the metal proved mixed. Palladium initially outperformed, driving the PT/PD ratio to a fresh low of 1.87 on July 18, before it lost ground into early September amid stale ETF and fund liquidation. The ratio peaked at 2.16 when palladium struggled to hold onto $700 but that level would provide support over the remainder of the quarter, with the ratio back below 2.0 by the end of September.

Current situation
Both metals have rallied into early September, bolstered by fresh wildcat strikes in South Africa and strong investment demand in platinum.

Summary of outlook for 2014
While the PGMs have succumbed to the price weakness witnessed across the metal complex, divergence has emerged across the year as the tighter fundamental picture provides strong background support. Palladium gained three percent across the first three quarters while gold fell 20.7 percent, silver an even larger 28.5 percent. We suspect this trait will continue into the year ahead owing to the growth in global vehicle sales, lower supply outlook from South Africa and exhausted Russian state stocks. While the scale of fund and investment longs is a bearish factor, we see these posing minimal risks given the likely supply shortfalls. In addition the approval for the Absa palladium ETF could bolster the upside potential into 2014, given the level of interest in the platinum fund.

Supply outlook
Disruptions to South African mine supplies continued during the period, although the anniversary of the Marikana shootings passed without incident. The more militant Association of Mineworkers and Construction Union (AMCU)

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Quarterly Metals Report

Precious Metals
October 2013 called for industrial action at Anglo Platinum’s Rustenburg works to protest against planned restructuri ng. Workers downed tools on September 27 and remained on strike till October 10, resulting in the loss of 44,000 ounces in lost production. Zimbabwe's re-elected Robert Mugabe government is set to push ahead with plans to seize control of $7 billion of foreign-owned mines assets unless they cede 51 percent of their assets to black investors or the government. Swiss trade data showed minimal palladium exports during the period, compared with spikes in March and May at an average of 6,400 ounces per month. Meanwhile speculation emerged early in July that Gokhran, the Russian State Repository, might look to rebuild its state stocks. As with gold, we also anticipate weaker prices to slow jewellery scrap flows, although scrap from spent autocatalysts will continue apace, owing to its price inelasticity.

Demand outlook
PGM demand from several industrial applications is expected to increase over the year amid improving economic conditions. Demand growth in particular will again come from the automotive sector despite the impact that turbulence in emerging markets has had on vehicle sales. The Society of Indian Automobile Manufacturers (SIAM) recently forecast the Indian market to contract in 2013 for the second consecutive year. But global vehicle sales continue to expand, led by strong growth in the US and China – light vehicle sales are up 8.1 percent and 11.8 percent year-on-year respectively in the year to date, according to the latest data. Still, automakers have been increasing the platinum loading within gasoline auto-catalysts, substituting away from palladium. Jewellery demand may also be stimulated owing to the recent price corrections, and will certainly temper scrap sales. Demand for PGM jewellery in India could again take some market share given the import duty increase for gold. We continue to see investment demand as the major swing factor for PGM fundamentals. Net platinum holdings had increased to a record 2.283 million ounces by the end of the quarter. Interestingly, though, we note a shift in sentiment - holdings in most European and US-listed funds declined while holdings in the Johannesburg-listed NewPlat fund increased 54 percent or 231,000 ounces to a record 658,800 ounces.

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Quarterly Metals Report

Precious Metals
October 2013 Net palladium holdings declined some 106,500 ounces by contrast although Absa bank has been granted regulatory approval to list its palladium fund - given the popularity of the NewPlat fund, this could add a new demand stream.

Conclusion
The bearish sentiment in gold will probably overhang the PGMs, although the absence of any sizeable exodus of investment monies - certainly from ETFs - reflects the positive fundamental picture currently unfolding. We feel this trend will continue, given the strong growth in vehicle sales, particularly in China and the US, and the potential for supply disruptions. Platinum should find further support around $1,280, below the cost of production for several South African producers, while resistance towards $1,650 will provide the top of the range. Palladium will continue in a wide range, with support at $600, while the metal could surpass the February 2011 high of $862 should investment demand prove strong, retesting levels not seen since 2001.

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high levels of inventory and only limited production cuts so far. but the market is in chronic oversupply as it has been for seven years and market forces are likely to change that before too long. Fundamentally. Given the plentiful supply. a need to chase prices higher.we feel they will end up doing so . the demand outlook for aluminium remains second to none.758 per tonne late in June and have since largely oscillated sideways.9 percent short-covering rally in August that was prompted by the combination of betterthan-expected data out of China and some dovish comments from the Fed. prices should head lower .Quarterly Metals Report Aluminium October 2013 Aluminium Introduction Aluminium prices set a low at $1. it seems likely that the upside potential for prices will be limited to bouts of short-covering. although there was a significant 10. indeed. Page | 20 . The rally did not last and prices quickly returned to lower levels.but for now the mechanics of the LME and abundant and cheap liquidity are enabling suf ficient metal to be kept off market to underpin the market’s price structure. which we take as a sign that there is not much appetite or. How long these factors remain in force is debateable .there are numerous crosscurrents at work that could bring about meaningful change. Overall.

reduced liquidity or a higher cost of money. Proposed rule changes to LME load-out rates led to lower physical premiums. enough of the supply surplus is being kept off market to underpin LME prices and the presence of a full contango means metal can still be financed profitably. idle capacity would restart if prices were to rise too quickly before the excess inventory has been drawn down. Needless to say.Quarterly Metals Report Aluminium October 2013 Current Situation Despite being in a supply surplus. the CFTC and the Department of Justice are investigating aspects of the metals market to see if rules and anti-trust laws are being broken and the Federal Reserve is reviewing whether banks should be allowed to trade physical commodities. Given the fact that Chinese capacity has been increasing strongly. which might mean banks have less liquidity at their disposal to carry on doing financing deals.760 and $1. that is). we will keep this outlook for 2014. China and the US remain the regional bright spots. The opportunity cost of financing metal might rise. there is a danger of increased exports of semis. So there are numerous potential developments that might lead to the practice of holding metal off market grinding to a halt. this sentiment is liable to be relatively short-lived. any acceleration of load-out rates is unlikely to increase availability to consumers unless exit queues drop dramatically. however temporary. the market trades most of the time either side of $1. prices may fall. In addition. In the US. Although cuts would be a bullish sign. so perhaps prices will hold down for longer than many in the market expect (if they expect lower prices at all. That said. An eventual tapering and unwinding of quantitative easing (QE) is also likely to reduce liquidity in the financial system. We have also seen a spate of announcements of Western production cutbacks which have had the effect. which in turn are squeezing producers’ margins. as liquidity is drained the cost of money may well make financing deals less viable.770. following their fall in the immediate aftermath of the LME consultation document. Factors that could bring about lower prices include regulatory rulings. which in turn is likely to see prices realign with fundamental drivers. We have no quarrel with the outlook for aluminium demand but there is a risk that circumstances might change .should less metal be held off market. which we feel the industry badly needs for the long term health of the industry. there seems to be a floor price in the market between $1.800. falling prices are likely to lead to more pronounced cuts to output. Summary of outlook for 2014 Our view for 2013 has generally been for a rangebound market with a slight downward bias. although Chinese production is ramping up rapidly. but so far premiums have not fallen to the extent that they are sparking additional producer cuts. Quite the reverse. albeit regionally subsidised by energy deals and SRB support. This suggests that marginal producers must have been well hedged but high Page | 21 . This suggests the practice of restricting availability to match demand and support prices will continue. Supply outlook Aluminium production is at record levels despite the fact that a considerable volume of output has a higher cost of production than current prices. For now. Recent warrant cancellations have lengthened queues in Vlissingen and Detroit and boosted premiums to the $190 area again. of creating a stable-to-more bullish sentiment. with most of the cancelled warrants owned by financial players rather than by consumers.

primary global aluminium production recorded by the International Aluminium Institute (IAI). suggesting that any rally is seen as an opportunity to put on more hedges by producers.86 million tonnes per year is scheduled to come on stream so we wait to see if the government’s attempts to curb new capac ity are effective. Despite low prices.131 million tonnes in the same period of 2012 . with EMAL ramping up output at its Al Taweelah smelter in Abu Dhabi ahead of schedule.000 tonnes per year at Yunan Aluminium and 120.06 million tonnes in the first eight months of the year period. so the picture is one of rising global production.583 tonnes per day seen over 2012 as a whole.000 tonnes per year at the Xinheng Group . Non-Chinese production cuts of 760.841 million tonnes in the first eight months of the year from 14. while production is running at 66. where production climbed to 15. This practice is likely to continue. with around 2. The daily average rate of production in the January-August period was 135. Although China is cutting output .500 tonnes per day.672 million tonnes produced in the same 2012 period. This compares with capacity in the world ex-China of some 76. In 2013.Quarterly Metals Report Aluminium October 2013 physical premiums have also helped producers obtain a higher price for their output.8 million tonnes is expected from China and 0. was 32. 000 tonnes this year to 630.000 tonnes per year at Chalco. so it will be interesting to see if it manages to wrest control of the industry away from local governments.541 million tonnes a year previously.100 tonnes per day and where production is runn ing at 69.1 million tonnes coming from China and 0. down from 17. production in the world ex-China totalled 17.438 tonnes. Western Europe and Asia (ex-China).all the growth is in China. which was higher than the 130. including data for China. with new capacity tending to be built in China’s western provinces where cheaper energy is available. South America. New capacity outside of China is expected to increase some 600. Page | 22 . Interestingly.0 million tonnes. production is expected to rise 2.000 tonnes per year next year. although regionally the picture is more mixed.2 million tonnes.4 million tonnes from outside China.000 tonnes per year Mahan smelter and the Ras Az Zawr (Ma’adan) smelter in Saudi Arabia also ramping up output from 237. up 3. 150. Production is rising in Africa. But these figures may well be revised downwards because we expect cuts to output.000 tonnes per year have been announced this year but this will be insufficient given that the market is already in a surplus and more capacity is being added. Hindalco stepping up output at its 360. although exports of semis are on the rise. In 2014. rallies in aluminium prices have been short-lived. of which some 1. Aluminium smelting capacity in China in 2013 is estimated to be around 96.000 tonnes in 2015.300 tonnes per day. including 380. In the first eight months of 2013. which highlights the extent of overcapacity. this might become a bigger problem for Western smelters as capacity continues to build in China.775 tonnes per day. the Arabian Gulf. there seems to be no stopping the growth in aluminium capacity in China. In 2014.000 tonnes next year and 740. Collectively. Therefore. we expect production to rise 3. East and Central Europe and North America and it is falling in Oceania.these are dwarfed by expansions.9 million tonnes from outside China. an extra 3.901 million tonnes.9 percent on the 31. China.smelters agreed earlier this year to suspend 1 million tonnes per year of capacity. some of the new production is being exported in the form of aluminium products. What is interesting is that very little primary production is exported from China despite all the growth there. China’s new government says it plans to cut investment in areas where there is overcapacity.

022 12.6 138.960 1.964 36.907 1.095 2.962 1.813 3.143 4.Quarterly Metals Report Aluminium October 2013 Primary Aluminium Production (in thousands of tonnes) IAI reporting area ex-China China Global total Global daily average 24.4 135. as are the auto industries in China and the US.022 16.043 2.2 131.6 129.870 1. So aluminium is winning market share from galvanised steel in the transport industry and copper in the electricity cable industry.2 132.but recent data has shown that growth has slowed.data for September showed sales were at their lowest since 1990. including copper.878 1.5 127.149 2.884 1.149 17.5 26.3 25.143 4.9 126.5 130.962 4.207 123. The aerospace industry is doing well.171 2.8 132.754 45.949 1.1 130.136 3.786 22. although vehicle sales in Europe remain depressed .748 1.986 101.1 133.5 131.966 2.023 4.764 1.872 1. Housing Stats in Page | 23 .149 2.024 4.929 1.787 3.204 4. In addition.066 3.5 25. steel and glass.187 2.944 4.063 43.6 135.989 47.121 4.131 41.6 133. Demand is also strong.989 120.910 4.072 2.098 3.6 132. which saves on shipping costs.731 1.153 112.862 1. Being a light metal and a relatively cheap one.1 133. it helps manufacturers produce more efficient and environmentally friendly products. The construction sector in the US had become a stronger growth area for aluminium . and tougher times in many emerging markets are likely to weigh on auto sales in these regions.151 4.earlier in the year it looked as if the industry was picking up momentum .842 4.6 132.203 25.111 2.633 2.183 2.154 1.100 2. in anticipation of QE tapering.153 2.9 Year 2009 Year 2010 Year 2011 Year 2012 Jan-Dec 2011 Jan-Dec 2012 Jan 2012 Feb 2012 Mar 2012 Apr 2012 May 2012 June 2012 July 2012 August 2012 September 2012 October 2012 November 2012 December 2012 January 2013 February 2013 March 2013 April 2013 May 2013 June 2013 July 2013 August 2013 Source: IAI Demand outlook Demand for aluminium is particularly robust considering the state of the global economy but the metal is seeing organic growth and is gaining market share from numerous other materials.4 139.049 3.176 1.9 134.165 2.3 million units from 16.212 120.108 2.786 43.177 2.7 26. Sales in September slowed to an annualised rate of 15.921 3.117 2. capital flight.717 1.917 1.1 million units in August but whether this is a blip in the data or the start of a period of weaker sales remains to be seen.981 2.065 2.203 17. There are also some concerns that auto sales in the US may start to suffer as rising bond yields force up the cost of vehicle financing.039 2.947 3.181 2.3 128. it is also making inroads into the bottling industry because aluminium bottles are much lighter than glass bottles.934 1.5 131.979 4.204 2.453 19.

070 45. although alumina imports dropped 38 percent to 2.000 tonnes from 400. Although we expect aluminium demand to remain robust. the impact could intensify. We have already seen capital flight in emerging markets in anticipation of QE tapering. Imports of bauxite remain strong at 46. were on the rise may be a harbinger of how the economy could be affected once tapering begins.234 Source: Official customs statistics Page | 24 .025 46. which affect mortgage rates. In China. less liquidity in the financial system and measures to tackle debt are likely to weigh on economic growth. the market may get more concerned generally about China’s production capability next year if Indonesia implements its ban in full. we are concerned that on a global level.000 tonnes in the same period in 2012.8 percent to a seasonally adjusted annual rate of 891.881 Bauxite 30.8 percent to 918.3 percent from 7. the fact it coincided with a time when bond yields.9 million tonnes in the same period in 2012. Still.Quarterly Metals Report Aluminium October 2013 August rose 0. FAI climbed 20.000 units and building permits declined 3.0 percent earlier . within that. So we have lowered our expectations for global demand growth in 2013 to 6. Chinese trade (thousand tonnes) 2011 2012 Jan-Aug 2012 125 516 5. We would not be surprised if this trend continues.020 39. when tapering actually starts.2 percent.0 million tonnes from 3.381 Change -23% -63% -38% +60% Exports Primary aluminium 194 82 Imports Primary aluminium 230 225 Alumina 4. Chinese trade Primary aluminium net trade in China dropped 73 percent in the first eight months of the year.4 million tonnes in January-August compared with 28. railway networks and power distribution are helping to restart the investment cycle. In the first eight months of the year.312 1.242 28. While this could be a dip in the data.2 million tonnes in 2012.820 83 400 3.930 2010 Jan-Aug 2013 64 150 2.000. with imports slipped to 150.we feel these headwinds will limit growth to six percent in 2014. China has broadened its bauxite supply base in recent months and has built alumina capacity near domestic bauxite supplies. Exports remain relatively constant but are insignificant given the size of the market. indeed.3 percent. The run-up in bauxite is no doubt in anticipation of tighter supply next year when the Indonesian export ban comes into effect. construction climbed 24. fixed asset investment (FAI) in construction.

This metal poses little threat to the market while it can be financed. more metal could Million tonnes 6 5 4 3 2 1 0 16% 14% 12% 10% 8% 6% 4% 2% 0% 1985 LME Stocks as a % of Annual Consumption 1999 1987 1989 1991 1993 1995 1997 2001 2003 2005 2007 2009 2011 Source: FastMarkets. The combination of these and exchange stocks means there is around 10 million tonnes of aluminium stock. LME hypothetically leave warehouses. But as things stand. In turn.000 tonnes each day in the first half of the year.200 tonnes per day since the LME announcement. they have since fallen to 5. Based on that. Balance As things stand. most of the cancelled warrants are owned by financial institutions looking to take metal out of LME warehouses to finance it in cheaper non-LME warehouses. We expect demand to remain healthy but the tapering of QE and later Page | 25 2013 2013 . A change in regulations that disqualifies banks from owning commodities. but that would change if any of the components that make financing viable change. The LME announced its proposed changes in early July and if the new rules are implemented then that could shorten the exit queues and in turn that would mean metal might not stay in warehouses as long. warehouse companies have reduced the incentives they were offering to attract metal into warehouse so less metal has been delivered in. If load-out rates increase. a closing of the Fed free-money window. a pick-up in interest rates/bond yields or higher warehouse rents due to regulatory changes could all alter the dynamics of financing metal. LME LME Aluminium Stocks 2008 2010 2003 2004 2005 2006 2007 2009 2011 2012 Source: FastMarkets. a faster drawdown of LME inventory could give the impression of a tightening market but this would be misleading if the metal was merely going into other warehouses. Inflows into LME warehouses averaged around 11.Quarterly Metals Report Aluminium October 2013 Stocks LME stocks changed direction in July having climbed to a high of 5. less liquidity.328 million tonnes. this has dropped to an average of around 5. It is now very difficult to gauge how much metal is held outside exchange-registered warehouses given the complicated movement in stocks but it is generally thought there are likely to be around 4-5 million tonnes of unreported stocks.486 million tonnes in mid-July. the aluminium market is expected to remain in a supply surplus as new capacity comes on stream at a faster pace than production is idled. in turn lowering physical premiums. is not thought to reflect a swing to a supply deficit but market mechanics tied into proposed changes to LME load-out rates. however. This change in trend. as is now the case.

900 range and to average $1.750-2. Generally.4 50.750 if the market gets nervous about extra availability. could produce headwinds for economic growth in the US and in emerging markets in 2014. cash aluminium prices averaged around $1.8 53.8 Consumption 35.8 50.4 41. WBMS.Quarterly Metals Report Aluminium October 2013 reduction in liquidity as the Fed’s treasuries mature. we are looking for prices to trade in a $1.400 $2. For the fourth quarter. Since prices are already well into the marginal cost curve. a potentially more bearish factor .00 +1. In January-September.664 $2.4 Balance +2.800 Conclusion Aluminium demand remains robust but contagion from a possible winding-down of QE next year is likely to weigh on global growth. LME load-out rates and tighter regulation will end up making it harder for producers and traders to hold metal off market. we are looking for prices to trade in the $1.4 Price $1.860. Global Supply/Demand Balance in Primary Aluminium (million tonnes) 2009 2010 2011 2012 2013(f) Production 37. So far this year.172 $2. making the market look more vulnerable.800 given another year of supply surplus and the presence of large stockpiles that might become less tightly held.830 so we will raise our forecast for the average of this year to $1. prices have held up well despite another year of supply surplus. we forecast an average price of $1. however. Page | 26 . The supply side of the equation is. FastMarkets forecasts 2014 (f) 53.860 Sources: IAI.4 $1.870 per tonne.10 +1.9 +0.000 range but there may well be downward spikes below $1.8 47.7 47.5 42. Looking to 2014.000 $1.4 +0.3 42.775-1.3 44. which would raise supply and lower prices.we feel the developments on QE.4 +0. lower prices are likely to trigger production cuts.

It expects growth in 2014 to be 3. which has of late been looking brighter. it trended lower. we feel the surplus will weigh on prices throughout next year.9 percent from its July forecast of 3.Quarterly Metals Report Copper October 2013 Copper Introduction After copper peaked at $8. it stands to reason that a deterioration in the fundamentals should put downward pressure on prices.024. which.600 in the year ahead. so we forecast a growing surplus. although stronger. remains weak. Current situation The rally after the 2008 sell-off ran until February 2011. The market feels well balanced for now .the IMF has recently lowered its forecast for global growth this year to 2. Given that copper prices are still trading well above their marginal cost of production.prices have since been rangebound between there and $7.2 percent.346 per tonne in February. There have been extended periods when prices have moved sideways but the overall trend is still to the downside. prices have since broadly oscillated lower. given the fundamental outlook.a scrap shortage has meant greater demand for copper cathodes but mine supply is now set to continue to improve.6 percent. bottoming out late at $6. Given Page | 27 .602 in June before rebounding to a high around $7. Global growth is lame .425 . Unless demand surprises on the upside. we would now look for the downtrend to extend below $6. The prospects for the tapering of quantitative easing (QE) and the fall-out this is likely to produce are expected to dampen the economic data.

The latest forecasts from the ICSG meeting in early October are for mine and refined copper production to rise 6.Quarterly Metals Report Copper October 2013 how emerging markets have reacted to the prospect of tapering. much will depend on how China performs.we expect this to continue in the medium term while investments made during the period of high copper prices are commissioned. But after years of high compound growth. Emerging markets are also likely to suffer further as liquidity is withdrawn while QE is reined in. This is part of the boom/bust commodity cycle . there are signs of some recovery but high unemployment levels make us wonder how much of the improvement merely reflects the shift from destocking to hand-to-mouth buying. Escondida and Frontier. In addition.high prices attract investment in new capacity.5 percent and 3. Los Bronces. Subsequently.5 percent is still significant for consumption levels. is rising as new capacity comes on stream. once these are brought online. Mina Ministro Hales and Toromocho.2 percent. which is no doubt tied into the supply disruptions at Freeport-McMoRan’s Grasberg mine and at Rio Tinto’s Bingham Canyon mine earlier in the year. Output has expanded or recovered at Antamina. Interestingly. In Europe. rapid growth was recently more evident in SX-EW but this sector is now slowing. While it has avoided a hard landing so far. Page | 28 . Outside of China. we would not be surprised if most forecasts for next year end up being revised lower. the US seems to be the one large economy that is continuing to recover but growing opposition to ever-increasing deficits and debt from the political right is likely to act as a brake that keeps growth subdued. while solvent extraction-electro-winning (SX-EW) climbed 4. ICSG data for the first six months of the year puts world mine supply growth at 8. Collahuasi. Buenavista. copper demand growth throughout the remainder of 2013 and into 2014 is likely to be weak while supply is rising. Summary of outlook for 2014 As always. This supports our view that mine supply is picking up at a faster pace than refined supply this year.9 percent respectively in 2013 and increase a further 4. The fact that this new capacity is coming on stream during a period of relatively subdued demand growth now runs the risk of adding downward pressure to prices. Supply outlook Mine supply is starting to increase at a faster pace . New production. the ICSG has cut its expected growth rate for refined production this year from 4. is likely to prevent any rapid return to strong growth.8 percent on the same period in 2012.3 percent.5 percent in 2014. we are not bullish for Europe. the firmer stance taken by the new government. The overall rise was partially due to a recovery in production that was for various reasons idled last year . Antapaccay. so concentrate stocks will increase. to name a few. especially on the shadow banking sector. The effects could worsen if this coincides with greater availability of metal from LME-listed warehouses and if there are fewer incentives to store metal off market in financing deals. with further capacity coming on stream this year at Oyu Tolgoi.5 percent and 5.2 percent.0 7. China’s economy is now so large that even growth of 7.either industrial action or production disruptions. however. Concentrate output increased at an even faster pace of 10. Caserones. it takes time for demand to rise to the extent that it again absorbs the new capacity. This will in turn boost treatment and refining charges (TC/RCs) so refined production growth next year is likely to be even stronger.

Quarterly Metals Report Copper October 2013 Chinese refined output has been increasing significantly thanks in part to the ever increasing T/C and R/C’s.550 10. North America and Asia. With manufacturing PMI data swinging from below to above the 50 level. and also shipments from European warehouses and also putting pressure on premiums here.406 1. therefore showing expansion. particularly with regard to warrant premiums where Far Eastern locations have been commanding high premiums for some time. global apparent usage was unchanged from the same period in 2012.764 period) Source: ICSG Change +8. a trend that should continue in 2014 other than in Oceania.5% 0% +68% Demand outlook In the first half of 2013. and with good investment in the power generation and distribution industry as well as in the railway network.9% 79. with Chinese apparent demand falling as imports declined.857 10.6% 80.4% 79. Chinese copper financing is still a major factor.it remains the single most influential demand component. climbing to 22.076 16.053 16. we expect global refined production to reach 20.8% 79.0% 78.248 18.830 20.000 tonnes and Shanghai Exchange stocks have also fallen since the start of the year.596 20. On a regional basis. Earlier in the year. bonded warehouse inventory reportedly climbed to around 900.666 Refined production 18. Page | 29 .0% utilisation Consumption 18. The fall in Chinese refined copper imports (which ICSG data would interpret as a fall in demand) has probably happened while consumers have drawn down stocks.346 19.050 1.963 8. with increases in the US and Russia offsetting falls in Japan and Europe. China accounts for around 40 percent of global copper consumption . actual usage is likely to have continued to rise.129 9. September imports of scrap and concentrate showed marked increases and very recently reports confirm that concentrates from Oyu Tolgoi are reaching smelters thanks to agreements with the Chinese customs officials. In addition.Jun ’12 Jan-Jun ‘13 Mine production 15.205 1.070 19.000 tonnes before dropping back towards 350. despite the slower physical demand.8% +5. underlying demand for copper wire and cable is expected to be strong. Apparent credit tightening has been prevalent in recent days as the Chinese central bank has restricted cash injections and consequent sentiment.943 16. Still.9 million tonnes. In 2014. Historical global copper production and consumption (thousand tonnes) 2009 2010 2011 2012 Jan.475 million tonnes. The strongest mine growth is expected in Africa. mine output has been growing in most regions this year.199 1. Consumption was flat outside of China but there were regional differences.697 7.2 million tonnes in 2014. even though the industry faces competition from aluminium cables in some applications.376 1. the march of urbanisation continues and the building of infrastructure and social housing should keep demand for copper buoyant in China.981 19.403 Refined capacity 77.386 10. with stocks of copper held in bonded warehouses in China thought to have declined significantly. with Europe seeing only slight increases. For 2013.385 Refined balance +178 -365 -234 -421 -529 18 Period stock change +275 -177 6 200 -150 358 Refined stocks (end 1. refined production is forecast to grow at its fastest in Africa where refined production is expected to climb 14 percent to 1.

demand for EU exports may suffer.in that if demand for Japanese goods rises. from 2. along with many other emerging market economies.the significant increase in sales tax to 8. demand for other countries’ exports is likely to suffer . no doubt made up for the lower level of imports.000 tonnes in the same 2012 period. high unemployment and high debt .387. Higher domestic production. We remain positive for Chinese growth overall but feel the recovery may be relatively weak while the new leaders stamp their authority on local governments. demand for copper should grow around 1. demand for copper. We were turning more bullish for Japan . is likely to reduce investment in infrastructure. the auto industry has gained momentum this year and the housing market has picked up. both of which are bullish signs for copper demand. debt and on reining in QE it looks as though the economic recovery may well struggle across the rest of this year and into 2014. there has been a pick-up in some data . the situation remain fragile as even the prospect of tapering lifted bond yields. In emerging markets. even though the underlying trend is still likely to be one of recovery.1 percent this year.0 percent may well dampen domestic demand while strengthening the yen.government stimulus efforts and the lower yen looked set to increase demand for exports as well as boosting domestic demand.Quarterly Metals Report Copper October 2013 In Europe. Into 2014. In the US. On balance. in Page | 30 .925. but with some improvement in North America too. This. with it.000 tonnes.the manufacturing PMI readings have moved above 50 although the data for September showed month-on-month weakness so there still seems little room for optimism.the key for the copper market as far as Japan is concerned is whether domestic demand rises. Tokyo's tone seems to have changed . the shadow banking sector and on the practice of misallocating capital investment.both government and private . centred on emerging markets. helped by a 33 percent increase in concentrate imports and stock drawdowns. However. the capital flight and currency weakness that goes hand in hand with the tapering of QE is likely to hit domestic consumer demand and strain government finances. especially housing. which in turn could hit regional copper demand. Chinese Trade In the first eight months of the year. which saw scrap imports fall 9. we are not surprised that the pick-up in global mine production has seen the Chinese prefer to import concentrate rather than cathode .will keep the economy subdued and.0-8.0 percent band while Beijing targets sustainable growth that will not bring inflation with it.this is a trend we expect to see continue in 2014. What will be interesting will be whether the LME/Shanghai arbitrage window reopens if copper prices fall. which has in the past led to the building of excess capacity.5 percent during the same period. with the euro relatively strong while the yen and Indian rupee have weakened. Higher copper concentrate imports have been driven by a shortage in scrap availability. refined copper imports dropped 19 percent to 1. As Japan’s demand for copper to produce goods for the export market is seen as a zero -sum game . in turn. We now expect a period of relatively slow growth in China in the 7. In addition. With China liking to add value where possible. With the focus on US deficit.0 percent from 5. especially China. which in turn raised the cost of corporate borrowing/mortgage rates. these have become a headwind for these sectors.

off-warrant stocks are unlikely to be that great. One key issue will be how much metal continues to be financed off market. The drawdown in stocks is thought to be the result of a combination of metal being drawn down to offset production losses to make up for scrap shortages and as some metal moved off warrant into financing deals. In the first half of the year. stocks are well down from this year's peaks.000 tonnes at the end of 2012.7% Stocks Exchange-traded stocks were around 693.796 tonnes per day since July.they climbed to a peak of 678. with concentrate and cathode inventories rising – in turn this could help cushion LME prices.0% 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 Page | 31 Source: FastMarkets. an increase of 16 percent or 97. down from a peak of 678.500 tonnes at the start of the year .7 2.5% +32.712 tonnes at the start of the year. though.0% LME Stocks as a % of Annual Consumption % 2.776 4.998 Copper concentrates 1.9 Imports Refined copper 3. Interestingly.Quarterly Metals Report Copper October 2013 which case much of the world’s copper surplus could end up in China.717 Source: Official customs statistics Jan –Aug 2013 221 1.185 Copper scrap 3. up from 596.450 tonnes.0% 0.403 4. warehouses have been less inclined to offer incentives so the outflow has continued while the inflow has slowed. before the LME announced it would review its load-out rules.789 274 3.093 1.225 tonnes.500 tonnes. down from a peak of 247. Shanghai Exchange stocks were last at 151. Chinese copper trade ('000 tonnes) 2010 2011 2012 Jan.925 2. the daily average inflow was around 4.859 2. LME One of the reasons for the build-up in LME stocks earlier in the year .Aug 2012 38.387 3.591 tonnes. In addition.500 tonnes in early October.300 2009 Exports Refined copper 72.was warehouse companies offering incentives of around $100 per tonne to attract metal into warehouse.192 207 2. .920 4.225 tonnes on June 26 from 320.364 1. Given the apparent supply deficit until this year.813 154 2.843 tonnes were down from 70.8% -19. and Comex stocks at 29. bonded warehouse stocks in Shanghai have fallen.0% 4. LME stocks were last at 512. 6.3% -9.124 tonnes.798 1725 Change +6. With the rules governing LME load-out rates now under review.900 tonnes per day but it has dropped to 1.687 1.

850 tonnes and New Orleans at 45. the market remains fairly well balanced but the outlook is likely to be biased to the downside because a bigger supply surplus is expected next year .250.40 0. which in turn may keep prices towards the lower levels of our expected range and the upper reaches only likely to be reached during short-covering rallies. We have therefore revised our forecast surplus to 170. In line with a larger surplus expected next year. we would look for prices to average $6.700 tonnes at the end of September.60 20.37 -0.23 -0. Although the supply/demand surplus is relatively small.07 19.250 Sources: ICSG. sentiment will focus on the likelihood of a larger surplus next year.000 tonnes.420 range.60 0. if copper trades between $6.000 tonnes in 2012.20 21.73 Balance +0. Antwerp at 76. as recovery in manufacturing PMIs suggests .700 tonnes. which account for 51 percent of total stock. which the ICSG forecasts around 387.000 tonnes. there is little sign of tightness in the forward curve. according to ICSG data. The bulk of the cancelled warrants are held in Johor at 131. followed by an even bigger surplus in 2014 of 632.384 in the first nine months of the year. we would expect an average price for the year of around $7. just slightly below the average of $27 for the year to date.000 tonnes from 200.this year’s surplus is likely to be lower than originally forecast while growth has improved.535 $8.Quarterly Metals Report Copper October 2013 Cancelled warrants stood at 266.700 and $7. Conclusion Prices averaged $7.900 Balance After a supply deficit of 421.83 20. with the cash-to-three months spread around $26 per tonne in early October.800 in 2014.420 in the final quarter and mostly in the $7.155 $7.000 tonnes.000 tonnes this year.18 -0.it looks as though consumption will also be slightly stronger than we originally thought. Despite this level of cancelled warrants and their concentration. FastMarkets forecasts 2014 (f) 22.075-7.51 20. Page | 32 .925 tonnes – these locations hold 96 percent of cancelled warrants.60 $6. Global supply/demand balance in refined copper (million tonnes) 2009 2010 2011 2012 2013(f) Production 18.425 tonnes on June 26.17 Price $5.11 20.35 19.810 +$7. Given that there have been some supply disruptions . Given this is just one percent of global consumption.98 19.25 18. having peaked at 375.946 +$7. the market has swung into a surplus.90 Consumption 18.we forecast it at 600.

Page | 33 . setting a series of higher lows. So it looks as though the market is well supported by scale-down buying. The fundamentals look set to remain tight and.lead could be one of the outperformers when that happens but until then we expect the sideways trend to continue. given a robust demand profile. This may well reflect generally low investor interest in the metals while consumers are content to live hand-to-mouth. we feel prices will remain well supported.938 per tonne in April. prices have been oscillating sideways to higher. Given that exchange stocks are low and the market is showing a small supply deficit.Quarterly Metals Report Lead October 2013 Lead Introduction Lead prices are generally holding up well . it is surprising that lead prices are not firmer. although buyers do not feel the need to chase prices higher. unless they are covering shorts. But it may take a change in broad-based investment sentiment to the bullish before lead prices really respond .since hitting a low of $1. although the August peak just fell shy of overcoming the May peak.

With QE tapering to come.84 million tonnes from 1. The latest International Lead Zinc Study Group (ILZSG) data showed the market was in a 41.7 percent despite a recovery in output at Invernia’s Paroo Station (formerly Magellan). This could be explained by a proportion of the fall in LME stocks representing metal moving off-warrant into financing deals.000-tonne supply deficit in the first seven months of 2013.000 tonnes in 2014. up 2. mine output during the first seven months of this year has fallen 2. we see the move towards a supply deficit next year and the low level of stocks as supporting factors for lead prices. outside China. So while the market remains roughly balanced in our view. Further ramp-ups in output at these mines and at a handful of Western mines next year are expected to lead to an extra 130. to increase by around 230.83 million tonnes.Quarterly Metals Report Lead October 2013 Current situation Lead prices averaged $2.6 million tonnes . China’s mine output increased to 2. For 2014. On the supply side.000tonne increase in Italian output in the first seven months of the year. 21. compared with a 31.2 percent to 11. In addition.153 in the year to date. according to ILZSG forecasts. global lead mine output has increased to 5. some 56 percent. Given the tightness in scrap supply and therefore the relative high cost of scrap. we assume that most of the scrap metal generated is being fed through to supply. for seasonal reasons.000 tonnes of output.24 million tonnes. increased output at Mt Isa and a host of incremental increases at other non-Chinese mines. Page | 34 .5 percent in 2010. although there was a pickup in non-Chinese mine output last year.054 in the second quarter.24 million tonnes from 3. an increase of 1. So China accounts for 88 percent of the increase.103 per tonne in the third quarter. Mine production in China grew 23. Summary of outlook for 2014 Our outlook for the rest of 2013 is for the market to remain roughly in balance and for prices to stay rangebound with a slight upward bias.4 percent from $2.000-tonne surplus throughout the whole of last year. Supply outlook The lead market is unique in that more supply is derived from recycled lead than from mine supply. we are concerned that capital outflows in emerging markets will dampen demand for autos there and we expect auto sales in Europe to remain sluggish too.an increase of some 1. at the macro level we expect good growth in the US and China for automotive batteries and steady growth worldwide for industrial batteries. the 132.552-tonne fall in combined exchange warehouse stocks since this year’s highs suggests a larger deficit.4 percent in 2011 and 18 percent last year – in the first seven months of 2013 output has increased at a slower rate of 11. Any new lead demand generally must be met from an increase in mine output. During this period. Of total refined lead supply of 5. the latest ILZSG forecast is for global mine output. and have averaged $2.256 million tonnes in the first half of 2013. In the three years between 2009 and 2012.7 percent to 11. came from secondary supply and 44 percent came for primary supply.02 million tonnes this year and 4.5 percent. The restart of the Porto Vesme smelter in Italy partly explains the 40. Global refined output will rise 4. In recent years the bulk of the world’s mine production increase has come from Chi na but the rate of growth is now slowing.48 million tonnes next year.41 million tonnes. The other noticeable increase. including China.

545 10. The fact that this is new technology means it is being introduced despite the economic hardship that is being felt in many parts of the world.6% +7. which has boosted demand of original equipment lead-acid batteries. especially when interest in investing in new lead mines is minimal because of environmental implications.741 $2. the number is around 600.521 5. as the ILZSG data above shows.172 $2.846 6. As more business is done online.804 10.776 10. such as 4G mobile telephony and cloud computing .Jul 2013 2012 9. The one potential growth area for lead supply is secondary production in China. the real growth in demand for automotive batteries comes from those countries where the vehicle population is growing: emerging markets.4% +7.456 5.000 tonne-per-year Herculaneum primary smelter at the end of 2013 will reduce regional supply in 2014. Estimates are that the introduction of 4G technology in Europe. and in China.6 percent growth in the first seven months of the year.4% Production Consumption Balance Price Source: ILZSG Demand outlook Lead consumption growth is strong. Robust demand is evident across the auto and non-auto industries.159 Change +5. Still. Historical global supply/demand balance in refined lead (thousand tonnes) 2009 2010 2011 2012 Jan – Jul Jan . demand for back-up power has taken off.Quarterly Metals Report Lead October 2013 has been in the US. as computer networks control more aspects of our lives and as cloud computing becomes more popular. there are 790 vehicles per 1.000 of the population. What is more. while replacement batteries provide a regular source of demand. with 7. we are concerned that the contagion from QE tapering may dent demand in the short term. Non-automotive battery demand is benefitting from the roll-out of new technology.402 $2. Even if government restrictions on car ownership in over-congested cities continue. In turn.011 $2. which is likely to hurt economic growth in the countries affected. Vehicle sales in China and the US have been strong. Although the medium-term outlook for emerging market demand for vehicles is strong.396 10. Already the threat of tapering has seen capital outflows in emerging markets. there is still potential for greater ownership in less congested cities and for e-bikes generally. where the auto and e-bike populations have taken off in recent years. Whereas demand for vehicle batteries in mature economies is fairly stable. for example. The other plus is that these industries have a global footprint. e-bike batteries generally need to be replaced each year.200 -9 +28 +149 +65 +84 -41 $1. while an e-bike battery tends to weigh around 11 kg. which in turn may alleviate pressure on miners to bolster supply. the closure of Doe Run’s 130. An average car battery contains around 10 kg of lead. whereas car batteries tend to last three-to-five years. first-time buyers of vehicles might well delay purchases.197 9. There is huge potential for the global vehicle population to grow. The development of new technologies in recent years has also boosted non-auto battery demand.762 6. We expect the recycling industries to become more effective and efficient. it is closer to 85. the Middle East and Africa will Page | 35 .these require back-up/emergency power.159 9. In the US. which we feel it will.206 9.062 $2. in Japan. where new secondary output has been ramped up.

Tightness in the West. nor the use in the other applications mentioned above. The negative LME/Shanghai lead arbitrage has made it costly to utilise imported lead concentrates. or half. so demand for domestic concentrates has increased but that in turn has lowered the treatment charges for domestic concentrates. Page | 36 . More noteworthy. the price of nickel-metal hydride or lithium-ion batteries. Given the difficult producing climate.873 tonne s in early October. is that Chinese imports of concentrates have fallen this year . they dropped to 180. Normally the flow is in the other direction because an export tariff deters exports.51 million tonnes in 2014. the lead-acid battery has remained popular mainly because it has proven itself up to the job and its cost advantage over other types of batteries. Advances in technology are also likely to ensure that lead-acid batteries retain their strong presence in the non-auto battery market.2 0. down from a peak of 140. the lead-acid battery was used in 91 percent of e-bikes . Chinese lead trade (thousand tonnes) 2011 2012 Jan-Aug 2012 0 9 1003 0 7.4 626 2010 Jan-Aug 2013 9. given the low price. Having started the year at 317.in the first eight months of the year. Shanghai stocks have also been falling .000 tonnes. We feel the fall in stocks in Shanghai is a result of the difficulties that domestic producers are experiencing.they stood at 88. which is also squeezing producers’ margins.in the first eight months of the year.the batteries were a quarter.750 tonnes in March.Quarterly Metals Report Lead October 2013 require some 300. imports have dried up and 9.6 percent to 11. down 19 percent on the corresponding 2012 period. for example. stocks in Shanghai have been falling. Chinese trade The trade flow for refined lead into and out of China is minimal . imports totalled 507. The latest ILZSG forecast is for global demand to rise 5. LME lead stocks had been falling at a fast pace.000 tonnes of lead in industrial batteries and that does not include other regions.425 tonnes on September 10. with tighter spreads on the LME and higher physical premiums have attracted some lead exports from China.700 tonnes. In China in 2011. Despite completion of batteries made from different metals.0 percent to 11 million tonnes this year and 4.20 507 Change Exports Refined lead 23 6 Imports Refined lead 22 7 Lead concentrates 881 794 Source: Official customs statistics -19% Stocks Up until the second week in September.200 tonnes of metal have been exported.

521 Consumption 9.000 tonnes this year before a swing to a 23. The cumulative surplus since 2009. Generally. This highlights that. but economic headwinds while excess debt levels are tackled and contagion from QE tapering may well affect demand for automobiles in emerging markets.206 9. means that total stocks are still thought to be low and are likely to move relatively lower as the market moves into a deficit next year. FastMarkets forecasts 2013(f) 11. Global supply/demand balance in refined lead (thousand tonnes) 2009 2010 2011 2012(f) Production 9. this looks set to be the case next year too.200 range in the fourth quarter and are likely to average $2.Quarterly Metals Report Lead October 2013 LME stocks jumped 65.100 before strengthening next year to average $2.000 +20 $2.000 tonnes but the generally low level of exchange stocks. look set to remain well supported. with only a small supply surplus expected this year.275 Conclusion Lead prices are holding up relatively well and.550 -70 $2.so we feel prices are likely to hold in the $2.020 11. amounts to some 242.480 11.supply and demand are nearly balanced and stocks are low .197 9.150 2014 11.456 Balance -9 +28 +149 +65 Price $1. we have viewed the market as fairly well balanced.275.675 tonnes in the four working days ahead of the September date. with supply moving into a deficit of around 70. Page | 37 . given that the surpluses last year and this year have been equivalent to less than one percent of annual consumption.062 Sources: ILZSG. rather than borrow into a tighter LME spread. which also expects a small surplus of 22. Given low inventory levels. Balance The lead market has been in a supply surplus since 2010 according to the ILZSG.172 $2. which stand at around 325.776 10.020-2.000 tonnes. lead’s fundamentals look relatively firm . which was mobilised when shorts on the LME decided to deliver against their shorts.000 tonnes. there was still considerable stock held off market. The fundamentals are expected to tighten slightly next year.545 10.402 $2.000-tonne deficit in 2014.741 $2.804 10.396 10. according to ILZSG data. although stocks had been falling. Overall. next year's deficit should underpin prices more.

a short-covering rally is in progress at the time of writing.000. Despite low prices.975.770 and from $29. Indeed. prices have been rangebound between the low and $14.Quarterly Metals Report Nickel October 2013 Nickel Introduction Primary nickel prices have been under downward pressure for a long time due to oversupply and weak demand. we expect nickel to remain rangebound. we feel the downside risk is limited . any further weakness would probably trigger more cuts. Page | 38 . The ramp-up in production of nickel units from nickel pig iron (NPI) production and the commissioning of conventional capacity have been major factors behind the oversupply. LME nickel prices have continued to trend lower.425 in February 2011. Generally. the negative feedback loop between oversupply.205 in July from February's high of $18. with most of the trading either side of $14. With a solid base now seemingly in place. which means supply is likely to be price-elastic. One reason for the delay may be that producers are waiting to see how Indonesia’s proposed ban on the export of nickel ores will affect NPI production next year.with many miners operating at below their cost of production. which could be aggressive. The upside is also likely to be limited while stocks are high and there is no shortage of capacity. weak demand and high stocks seem to have broken in that there have not yet been sufficient output cuts to rebalance the market. reaching a low of $13. Since July. although supply disruptions either from cuts or an Indonesian export ban are likely to prompt short-covering rallies.

5 percent on the 2012 total. For 2013 as a whole. refined output in January-August totalled 1. With the nickel market likely to remain in a supply surplus through 2014. world primary nickel production is expected at 1. according to WBMS. the government may allow those in the process of establishing works there to continue to export ore. as the end of year approaches and traders focus on the potential export ban in Indonesia. Compared with mine output. this has weighed on sentiment and prices. According to the World Bureau of Metal Statistics (WBMS). we feel. The market will be very disappointed should the ban not be put in place. however. likely to keep downward pressure on prices next year. also deterred other producers of more traditional forms of nickel from making production cuts. Given that little or no new capacity has been built/commissioned in Indonesia. Still. nickel contained in mine output was 1.97 million tonnes next year. Originally. we should brace for a rally while shorts cover .000 tonnes on same period of 2012.mine output has increased as new projects have been brought on line. nickel prices should remain under pressure until stocks start to be drawn down. reportedly as low as $11. stocks of nickel ores at Chinese ports are high so it may take time for the supply side to tighten even if a ban is implemented in full. which highlights the surplus of nickel mine output. the fact producers have continued to ramp up output suggests they are either still well hedged or they are confident that the dynamics of NPI production will change before too long (either via lower Indonesian exports or higher export prices due to a significant rise in the export duty). Page | 39 . up 85. In the short term.000. Given the high levels of stocks and low prices. On balance. although we would imagine it would incur a higher export tariff.000. effectively undermining the previously perceived nickel base price of $13. Coupled with low demand for nickel from stainless steel producers outside China. The lack of clarity regarding Indonesia’s proposed export ban has. which should provide some cushion to NPI production if the export ban is implemented at the start of 2014. Production cost for new generation NPI plants are ever –decreasing.306. which also sees refined production rising 3. exacerbating the nickel market's supply surplus. though.800 tonnes in January-August. according to the International Nickel Study Group (INSG).Quarterly Metals Report Nickel October 2013 Current situation Miners and traders have ramped up nickel ore shipments from Indonesia ahead of the export ban.this appears to be underway. Considerable nickel ore stockpiles have built up at Chinese ports. up 8.338.91 million tonnes.000 tonnes. we see limited downside to prices in the near term. either by limiting the volume of exports or by increasing the tariff to an extent that more NPI production in China becomes loss-making. we expect Indonesia to restrict nickel ore supply. Supply outlook The nickel market remains in a large supply surplus .1 percent to 1. Another year of supply surplus and record inventories are. We also expect the demand outlook to improve slowly as 2014 unfolds. Summary of outlook for 2014 Because nickel looks to have formed a base below the marginal cost curve. the proposed ban would have prevented miners from exporting any ore that had not first been processed domestically.

Stainless steel production is expected to grow 7. The build-up of LME stocks shows how producers of class-one nickel .how strongly it enforces the export ban on nickel remains to be seen.133. As an example of how much NPI has displaced more traditional sources of nickel. the use of NPI is only really prevalent in China. While demand outside China is subdued. the use of NPI is hurting demand for class-one nickel. This is a vicious circle .rather than ferro-nickel or NPI have at least been able to sell metal via the LME and deliver it into warehouse rather than having to find a buyer in this oversupplied market. is very much a metal with a strong demand outlook. which should return NPI output. Between 1980 and 2012. But it continues to play hardball with tin exports . briquettes and pellets .0 percent globally in 2013. luckily for primary nickel producers. up 2. the CAGR of stainless steel has Page | 40 . Abundant nickel swing production capacity suggests nickel prices are likely to remain rangebound around relatively low levels. On balance. that could raise the floor price for nickel in turn.1 percent on the same period in 2012. that country's consumption has been growing at a steady pace of around 10 percent per year in recent years. this should improve the nickel market’s fundamentals. The main reasons why the use of NPI has not spread are believed to the cost of shipping large volumes of low-grade nickel ores.it is expected to grow around 1. its use has not spread to other stainless steel-producing countries. where output is expected to climb around 14 percent in 2013. production growth is subdued . Demand outlook Nickel demand in the first eight months of the year was 1.stainless steel is a metal with a rosy future that should continue to see strong compound average growth rates (CAGR).000 tonnes of nickel units from NPI this year. depending on how the costs of production affect the floor price. Demand for class-one nickel continues to face stiff competition from nickel units derived from ferro-nickel and NPI. cut cathode. one way of another. like aluminium. we expect demand for grade-one nickel to regain some market share but perhaps not until later in the year once stocks of nickel ore at Chinese ports have been run down. Outside China. Interestingly. NPI production looks set to continue to remain a swing factor in production.5 percent this year.Quarterly Metals Report Nickel October 2013 Indonesia has been hard hit by capital flight that was triggered by prospects for QE tapering and its currency has weakened significantly so it will be keen not to damage its trade balance further by imposing a total ban on exports of ores. These sell at a discount to LME nickel. we remain bullish .000 tonnes in 2010. One way or another. the net effect is likely to be a rise in the costs of NPI production. up from zero in 2005 and around 165. Combined with continuing good global growth for stainless steel. as well as the environmental issues related to processing. which is displacing non-Chinese production. With China such a large player in the stainless steel market.China’s use of NPI also gives it a competitive advantage when it comes to exporting stainless steel. It must also contend with growing exports of stainless steel from China. according to the WBMS. China will use an estimated 440.full-plate cathode. This suggests stainless steel. predominantly centred on China. as will high-cost producers using more traditional production methods.300 tonnes. to regulate nickel ore exports in 2014. With Indonesia likely. For nickel consumption overall.

9 Nickel concentrates 25. As always. INSG data suggests.000 tonnes at the start of the year and a low of 83. Chinese nickel trade (thousand tonnes) 2011 2012 Jan-May 2012 35 217 48.6 percent compared with CAGRs of 2. During this period. Generally. The market has been in a supply surplus of some 226.000 15 62 21. imports of all types of nickel into China have picked up as growth in stainless steel capacity in China sucks in raw materials and refined metal. the nickel content has picked up too.5 percent in aluminium and 2.154 2010 Exports Refined nickel/alloy 55. because rotary-kiln electric furnace (RKEF) NPI producers need higher grades of ore.256 36 160 65. we feel there is less likelihood of non-Chinese mills restocking.007 Source: Official customs statistics Jan-Aug 2013 34. Chinese trade China’s imports of nickel units in concentrates/ores has picked up as the market anticipates lower exports from Indonesia in the New Year.6 percent in copper.130 tonnes in November 2011. demand for nickel can take off if stainless steel mills restock but. 3. the INSG is looking for nickel demand to grow 6.6 percent in carbon steel over the same period. with so much stainless steel growth coming from China and Chinese stainless steel exports weighing on non-Chinese production.9 116 42. it stands to reason that the nickel surplus will show up within the more Page | 41 .6 percent in 2013 and is forecasting growth of around 4. In addition. The fact stocks are not even higher would suggest that metal has also left LME-listed warehouses for off-warrant financing deals.5 percent in 2014.000 tonnes so it looks as though the market surplus has found its way into the LME.000 tonnes (on a pro-rata basis) since the start of 2012.971 Change +74% +19% +10% Stocks LME nickel stocks have climbed extensively this year they stood at around 230. In summary. we expect demand growth for nickel to remain relatively upbeat in line with strong demand growth for stainless steel. Given our overall economic outlook for subdued global growth in 2014. the inflow of metal into the LME warehouse system has been around 340.000 tonnes in mid-October. up from around 140. Since cheaper nickel units that are non-LME deliverable are likely to be the most sought-after.2 Imports Refined nickel 182.Quarterly Metals Report Nickel October 2013 been 5.

We see nickel trading within a range of $13. But we expect a smaller surplus next year. A short-covering rally seems to be in progress. at least while there are nickel ore stocks at Chinese ports.500 Sources: INSG. This is likely to act as a cap on prices. likely to be seized by high-cost producers looking to put on forward hedges.770 +88 -40 +15 +100 +120 $14. which is likely to cap the upside for nickel prices other than during periods of restocking by stainless steel mills or of short-covering. Prices will remain suppressed next year. we feel the market will have to live with high stocks for a considerable time to come.000 across the fourth quarter. which will lift marginal costs of production for the remaining NPI production.300.500. Rallies are. Global supply/demand balance in refined nickel (thousand tonnes) 2009 2010 2011 2012 2013 (f) 1.241 1.500-15.330 1.200 Production Consumption Balance Price 2014 (f) 1. With LME stocks alone accounting for some 14 percent of annual consumption.809 $22.480 1.760 1. We doubt the ban will have much impact in the short term while stocks of ore at Chinese ports are high. Page | 42 .950 1. with production set to increase via several new laterite mines coming online and NPI production expected to remain steady. either via production cuts due to lower prices or from a cut in the amount of nickel units coming from NPI production. lowering LME prices to levels that trigger more cutbacks. or else lower prices to force cuts at NPI and more traditional producers. We expect supply restraint will be forced upon producers either by lower exports of ore from Indonesia. LME stocks should therefore be a good indicator to when supply and demand start to rebalance.860 +90 $14. Given the combination of overcapacity and high stocks. FastMarkets forecasts Conclusion The nickel market remains chronically oversupplied and the growing surpluses seem unsustainable. production restraints should be countered by the ramp-up of new capacity outside China and greater availability of metal in LME-listed warehouses.660 1. supply is likely to remain price-elastic.440 1.640 1.890 1. Logically. averaging $14. we feel. The market ideally needs to swing into a supply deficit to reduce the stock overhang but until the dynamics of financing metal changes to the extent that metal stocks flow into the market. which is no doubt because the market anticipates some supply restraint from January when the Indonesian ban on the export of ores comes into effect. there seems little danger of a shortage in nickel developing any time soon. there is unlikely to be any shortage.Quarterly Metals Report Nickel October 2013 expensive LME deliverable metal.535 $15. Looking to 2014.625 1. Balance Nickel stocks remain at record levels and.272 $21. however. averaging $14.853 $17.

Indonesia’s government and main tin producer are now in a stand-off with physical traders and consumers. In short.880. this current situation suggests more of the same. Unsurprisingly. the higher price and lack of supply is encouraging consumers to seek out alternative sources of supply.500 tonnes in July and August and to 786 tonnes in September from an average of around 9.000 tonnes per month in the first half of the year. exports from the world’s largest exporter of tin have shrunk to an average of 6. In addition. prices have jumped to $24.000 and $25. Similar interventions by Indonesia in recent years have led to the wild oscillation in prices between $17.000 per tonne from a low of $18. Consumers will not be able to survive too long without Indonesian exports but likewise Indonesian producers will not be able to survive for long without the cash flow that exports generate.Quarterly Metals Report Tin October 2013 Tin Introduction The tin market has become most interesting. Page | 43 .810 in July. with intervention by Indonesia once again changing the supply dynamics.

In addition.000 but we do not expect Indonesian exports to remain suppressed for long.the market is finely balanced and producers are struggling to lift output now – and they are likely to struggle to raise output even more when global demand eventually picks up. tin stocks are not high enough to form much of a cushion so we remain bullish over the medium term for the metal. the more bullish we become as we expect a broad based recovery to get going and in light of that we would expect a pick-up in restocking. so if production needs to rise on stronger demand then it will probably have to come from existing operations.000. it is unlikely to last but it will provide producers around the world with the opportunity to hedge forward. Since the international tin market sees no fundamental basis to Indonesia's latest attempt to push prices higher.000 . Page | 44 .producers have had to contend with falling ore grades. Indonesia’s latest changes on tin export regulations have on the one hand meant producers have had to raise the quality of tin if they want to export and. supply has been struggling. which may well require higher prices to incentivise more output. we expect further range-trading into 2014. Overall. These two rule changes have led to a fall in exports . the run-up in prices in September and October will have provided marginal producers with the opportunity to hedge forward. they must now sell the tin-for-export on the Indonesian Commodity Derivatives Exchange (ICDX). This in turn is likely to enable marginal producers to stay in production for longer.there may well be spikes up to $25. When Indonesian exports resume. which will encourage other producers to lift output where they can. The further we go into 2014. These rule changes have for now boosted prices.Quarterly Metals Report Tin October 2013 Current situation The fundamentals of the tin market are some of the tightest of the base metals complex .the market is expected to be in a small supply deficit this year. higher production costs and environmental restrictions. Most producers are struggling to do so but the supply threat that Indonesia has introduced has encouraged China to import more concentrates from Myanmar. ignoring the current tightness . reaching 100 tonnes per day in October. as it has been for the past three years. Indeed. Trading volumes on the new domestic exchange are picking up. as have producers’ profit margins. The insistence that tin must first trade on ICDX sent exports plummeting in September to 786 tonnes.the export grade ruling was introduced in July.000 tonnes in the first half to around 6. sending exports from a monthly average of 9. While demand is holding up and even increasing slightly this year after falling last year. which should keep prices rangebound for longer. but there is still much uncertainty and reluctance by international consumers and traders to trade on the exchange because it is seen as a ploy to raise prices. The country’s tin reserves have generally have been out of bounds in recent decades while the country was isolated from the rest of the world but this has now changed. Summary of outlook for 2014 Our short-term outlook is for prices to hold up either side of $23. prices are likely to fall back to trade either side of $21. which should reduce the likelihood of production cuts in the months ahead.500 tonnes in July and August. on the other. of which 400 tonnes were ingot and the rest was solder. Supply outlook Mine and refined tin output has declined in recent years . There is no meaningful new capacity coming on stream until after 2014. With the market generally thought to be balanced.

9 percent in Japan. we see steady demand from this sector for now. 1. The opening up of Myanmar's tin industry might alleviate this. there is considerable spare smelting and refining capacity but generally a shortage of mine output. This should underpin firmer average prices in 2014 but the changes in Indonesian exports are likely to cause some wild swings in prices in the months ahead. down 2. price dips are likely to be well supported. producers export more because they need to make up for lost cash-flow.500 tonnes on the same period in 2012.400 tonnes. Global reported production was 232. 5.4 percent in the Americas. incentivised by higher prices. with global sales in July rising 5. but this is thought to be mainly due to continued destocking.000 tonnes. The country’s Department of Geological Survey and Mineral Exploitation has identified 480 tin and tungsten deposits. accounting for around 52 percent of overall tin consumption.1 percent on the same 2012 period. tin demand was 234.200 tonnes from the 2011 total. Myanmar may turn out to be an important area for new mine production but it requires time to establish itself.2 percent in Asia Pacific and 0. packaging companies are now focused on emerging markets where urbanisation and growing middle class are fuelling demand for more packaged food. The electronics industry is the single largest user of tin in solders. we expect tin supply to struggle to increase this year because restrictions on exports from Indonesia are likely to force smaller operators to idle production. We expect lower Indonesian exports to spill over into the fourth quarter but we doubt the Indonesian government can afford the socioeconomic costs of smaller tin producers closing operations. So we would not be surprised if the market ends up in a bigger deficit than consensus for deficits of 1. Indonesian and Australian mining and exploration companies are trying to get a foothold there. The latest data from the Semiconductor Industry Association (SIA) paints a more upbeat picture. with potential primary and alluvial resources of some 40 million tonnes of ore. Last year.1 percent on July last year and up 2. down 2. while falling profits at PT Timah in the first half are likely limit how long the company can stand not to export. the changes have been short-lived . unsustainable price increases are unlikely to have much impact. Semiconductor sales are a good gauge of the state of the electronics industry.6 percent on June 2013. demand fell 5.900 tonnes in January-August.5 percent to 361. The second. With tinplate capacity expanding in China.3 percent in Europe.Quarterly Metals Report Tin October 2013 The potential bottleneck in tin supply is at the mining stage of production. although they may not chase prices higher. according to WBMS data. Although tin packaging has a solid base in mature markets. Demand outlook Apparent tin consumption continues to fall.000-7. rising 7. Healthy sales and the rally in prices since July may well spark consumer interest to restock. Chinese. according to the latest World Bureau of Metal Statistics (WBMS) data. producers are generally suffering from low ore grades and depleting reserves so incremental. Although output is likely to pick up slightly in other areas. On balance. In the past when the government or producers have taken action to restrict supply.as soon as prices rise again. Month-on-month sales increased across all regions and across every product type. In the first eight months of 2013.and third-largest consumers of tin are the tinplate and chemicals industries. Page | 45 .

China has stepped up imports from Myanmar. China has been a swing factor in recent years. down from this year’s peak of 5.9 10. That said. Linked to this is the substantial rise in Chinese concentrate imports. Since the requirement for Indonesian exports to be traded on ICDX from August 30. on the same period in 2012. This runs the risk of lowering GDP growth in emerging markets.340 tonnes seen on July 12. This seems to be partly due to the act of thrifting.000. decide to restock in case there are further supply disruptions. Chinese trade Chinese imports of tin in the first eight months of the year fell around 48 percent to 10. There is also the prospect for the adoption of mandatory restrictions on lead use in China's consumer products.exports may even pick up should China feel confident that exports from Indonesia will return to more normal levels. cancelled warrants have surprisingly not risen more. Overall. traders have drawn down LME stocks in anticipation of lower exports from Indonesia .780 tonnes in mid-October. if economic hardship shows up in reduced household spending. up 146 percent on the year.900 tonnes. down from this year's peak of 15. Chinese trade (thousand tonnes) 2011 2012 Jan-Aug 2012 32. we would not be surprised if refined imports slow further . we generally feel that tin consumption will increase in line with global growth. which might worsen when tapering begins.7 Change 146% -48% 112% Stocks LME tin stocks stood at 12. probably a reflection of destocking and a pick-up in refined output in China.8 2010 Concentrate Imports Refined Imports 24 Refined Exports 2 Source: Official customs statistics Jan-Aug 2013 58. importing when prices are low and exporting when prices are high.Quarterly Metals Report Tin October 2013 Tin’s use in the chemicals industry is seen as a growth industry. In mid-October.9 23 32 21 0 0 0. demand for electronics could fall. although the outlook for tin demand across all end-uses seems to be growing. the year-on-year increases seem relatively low. cancelled warrants stood at 2. especially while tin stabilisers replace lead and cadmium-based stabilisers.4 23. the demand outlook for tin is likely to remain subdued. given the broad base of applications in which tin is used. having seen the run-up in price. Despite continuing low exports from Indonesia.they are now at levels seen at the start of the year. The prospects for the tapering of quantitative easing have led to a capital flight from emerging markets. Page | 46 .9 1. To diversify supply away from Indonesia. Until there is more sustainable global economic growth. With prices now back below $23. we expect steady demand in this sector. where less metal is used per item. The one semi-bright spot might be if consumers.750 tonnes.440 tonnes in late August.

the wide swings in price have continued. apparent demand may improve if consumers feel the need to restock in light of the supply disruption.114 $22.000. Page | 47 . This has broadly played out.800-25. with just 110 tonnes in Baltimore and 30 tonnes in Rotterdam.a small deficit is expected this year and in 2014. This suggests that the tin market in 2013 may be a story of two halves.447 $26. with higher exports driving prices down in the first half before a trend reversal in the second half. This suggests premiums outside of Asia are vulnerable to spikes higher should the demand outlook improve and consumers elect to restock. For 2013. Balance The tin market is broadly balanced overall.000 and for 2014 we forecast an average price of $24. We expect prices to average $23. once the export bottleneck has been sorted out.Quarterly Metals Report Tin October 2013 The one noticeable feature of the distribution of LME tin stocks is that 99 percent are held in warehouses in Asia. we have raised our average price forecast to $22. FastMarkets forecasts 2014 (f) 344 0 344 0 24.000 Sources: ITRI. The supply disruptions in Indonesia may well bolster the deficit but higher prices should encourage a maximising of production where possible and higher exports from Indonesia at a later date.500. With supply and demand fairly well balanced.500 Conclusion We said in the July quarterly report that the extent to which tin prices have fallen is surprising but the incentive for Indonesian producers to increase exports of tin that would not make the new export grade ahead of the deadline is understandable. we feel . Global supply/demand balance in refined tin (thousand tonnes) 2009 2010(e) 2011 2012(f) 2013 (f) Production 336 350 360 335 337 DLA Sales 0 0 0 0 0 Consumption 321 363 365 341 341 Balance +15 -13 -5 -3 -4 Price $13.584 $20.000 $21.000 in the fourth quarter.000 area and consumers buying around $21. tin prices should remain rangebound overall with producer selling in the $24. Still.

718. We would therefore continue to expect good support in the $1.800 per tonne and capped by high stocks and the likelihood of producers selling above $2. A deteriorating economic climate. with previous support at $1. Any dip back into that range could well prompt production cuts.800 range. our outlook is for more of the same.75 and $2. Overall there seems to be good support around $1. brought about by reduced liquidity in the financial system as QE tapering could start next year.50 in 2011. leading to price dips but we would expect them to be relatively short-lived. The drop in price since the February peak and the downward trend that followed has now turned into a sideways trend.745 in 2012 and at $1. We feel that prices will remain largely supported by the marginal cost curve below $1. with prices trading between $1.700-1. which in turn could give prices a reason to rebound.811.800. Page | 48 .Quarterly Metals Report Zinc October 2013 Zinc Introduction Zinc prices remain rangebound.009.100.

the practice is likely to continue and prices are likely to remain underpinned. Bracemac McLeod in Canada and Perkoa in Burkina Faso. In addition. The industries using zinc in China look robust and the US auto industry is strong however the construction sector's use of galvanised steel is not recovering as much as was hoped. Summary of outlook for 2013 The outlook for zinc differs between regions as it does between industrial uses but the overall outlook for global demand is subdued. other than during periods of short-covering. exchange stocks have been falling.73 million tonnes this year and a further two percent to 14.000 tonnes as the ramp-up at these mines continues. the surplus between January-July equates to 120. output is expected to grow a further 400. roughly half last year's level and representing about one percent of annual consumption. Page | 49 . In 2013. which in turn has raised treatment charges. Supply outlook The market seems to have been focused for a long time on the large-scale closures that will hit the industry in the years ahead and has tended to ignore the supply surplus that has been present since 2007.000-tonne surplus in the same 2012 period and a 251. mine output outside China is expected to increase around 530. Mine production should grow 1. While it is still economically viable to store metal in financing deals. Perversely. Mt Isa in Australia.000 tonnes in the first seven months of 2013.000 tonnes. As for supply.000 tonnes across some 18 mines.7 percent to 13. however. Although supply and demand are expected to be roughly balanced this year. On an annualised basis. it is surprising that prices have not been forced lower to rebalance supply and demand but banks’ access to Fed-inspired cheap money and their involvement in warehousing has enabled the surplus to be held off market in financing deals. the fact that far and away the majority of stocks in Europe are tied up in finance deals.01 million tonnes in 2014. likely to cap prices. down around 290. After seven years of surplus.000 tonnes in mid-October since the start of the year. Zinc mine output is expected to grow modestly this year and next. Despite the surplus. European warrant premiums have been climbing steadily to reach around $155 mainly as a result of the skewed location of the majority of zinc stocks lying in New Orleans. according to ILZSG data. which suggests that supply and demand are fairly balanced. This visible stock fall is no doubt helping to underpin prices but most likely indicates that there is a build-up of off-market inventory. With mine output running ahead of refined production last year and again this year.000-tonne surplus over the whole of last year. China's expansion is expected to continue. and possible exports to the Far East. there has been a build-up in concentrate stocks. Demand in Europe remains in the doldrums and capital flight in emerging markets is expected to weaken demand growth. compared with a 140. the presence of large stockpiles of concentrates and refined metal and a surplus of refining capacity should mean there is no shortage of metal.Quarterly Metals Report Zinc October 2013 Current Situation The zinc market was in a supply surplus of 70. with the larger increases from the ramp-up of output at India’s Rampura mine. we see no shortage of mine output or refined output but availability is still likely to be restricted by traders’ ability to keep metal off market in cash-and-carry deals. The build-up of inventory is. This has encouraged a pick-up in refined output. In 2014.

it seems likely that either the cost of money. there is massive potential for growth.080 12.9 % -1.9 percent. the cost of warehousing or regulatory oversight will change to the extent that financing metal is no longer economically viable. Asia (ex-China) is up 4.34 Source: ILZSG Change +4.809 million tonnes. Historical global supply/demand balance in refined zinc (thousand tonnes) 2009 2010 2011 2012 Jan-Jul 2012 Jan-Jul 2013 Production 11. Page | 50 . This is encouraging considering the global economy is not experiencing concerted growth.8 percent to 7.Chinese smelters cut production last year.958.603 Consumption 10. while refined production increased 4.6 percent) and Europe (East and West) 1.298 12.7 % Overall.9 percent in 2014 to 13. we would expect the status quo to continue while surplus production can be profitably financed but there are risks to this assumption. Given zinc’s broad application base . Interestingly.533 Balance +366 +247 +374 +251 +140 +70 Average price $1. Capacity restarts have lifted refined production in Europe and in Latin America but the bulk of the increases were in China. Demand outlook Zinc demand climbed 5.896 13. the Americas 2.113 7.659 $2.253 7. engineering.26 $1.8 percent (with US growth of 3.159 $2.9 percent in the first seven months of the year compared with the same period of 2012.649 12.01 million tonnes and 4. In the US. something we feel will continue. which is likely to push prices down to a level that prompts production cuts. where output so far this year is up nearly 11 percent.4 percent this year to 13.6 percent (mainly due to strong growth in Russia). it is not surprising that zinc demand remains strong in China.608 million tonnes.706 12.it is used in infrastructure. while prices hold above that level.948 $1.925.342 7.65 million tonnes. China’s zinc demand has gathered pace as the year has progressed. the die casting and brass manufacturing industries together account for some 33 percent of consumption. although China is seeing the strongest growth in zinc demand of ten percent. Chinese smelters started to cut production last year when LME prices fell below $1. stock drawdowns and a return to a balanced market.demand is well placed to benefit from any recovery in a wide spectrum of industries. This is not surprising . global mine output rose 1.8 % +5.593 7.Quarterly Metals Report Zinc October 2013 In the first seven months of the year. ILZSG forecasts refined production to increase 3. The country's auto market also looks set to remain strong. around 50 percent of zinc is used to galvanise steel. At some stage. Africa is the only region where growth is slower.191 $1. With just 84 cars per 1000 population in China compared with 600 in Japan and 790 in the US. increasing amounts of the accumulated stock from seven years of surpluses will become more readily available to the market. Given that the trend in urbanisation goes hand in hand with infrastructure spending. construction. The credit squeeze earlier in the year has been rectified after the government made more money available and its investment in railways and infrastructure projects should boost zinc demand because galvanised steel is heavily used in such construction work.5 percent to 7. we expect production to continue to expand. according to ILZSG data. vehicle production and for white goods . most other regions are also growing.800. as we saw in the lead section.932 12. When that happens.

Talk of QE tapering triggered a rise in bond yields.0 7. This flow of metal from the West to China is helping to underpin LME zinc prices.0 515. Although ILZSG data for Asia (ex China) shows some strong growth.0 973.8 percent and 16.466 Source: Official customs statistics Stocks LME stocks have fallen 230. it looks as though the downward trend in stocks is set to continue. with regular shipments of similar quantities of metal leaving the same warehouses.8% Exports Refined zinc 43.675-tonne deliveries into New Orleans on July 16 and September 30. The concentrate surplus that built up last year has raised treatment charges. with 540.5 percent respectively. especially while the LME/Shanghai zinc arbitrage window is open. Chinese trade China imports of zinc units have increased .this is one area of the US economy that is flush with money. 2010 Chinese zinc trade (thousand tonnes) 2011 2012 Jan-Aug 2012 7. the auto industry remains upbeat and the construction industry is growing.0 303 600 Jan-Aug 2013 3. In the big-picture view of China. which in turn lifted mortgage rates and financing rates. Taiwan and Turkey look strong but demand has fallen in South Korea.54 million tonnes in 2014. it is hard not to be bullish for zinc demand given its broad application base. it looks a s though metal is merely moving out of LME-listed warehouses and into other non-LME warehouses where it can be financed more cheaply. so when tapering finally starts there is a risk that demand in the US will suffer. Japan and Indonesia. But it is interesting that the business sector of the economy is starting to spend more on construction .1 47. Demand in the 27 EU countries has also been stagnant. to which it can add value. while that of the Russian Federation is up 21 percent. even if it is not increasing as fast as was earlier expected.concentrate imports and metal imports have picked up 12.0 Zinc concentrates 1.8 percent to 12. Another sign that there are good levels of off-warrant stocks around were the 80.0 Imports Refined zinc 323. it varies from country to country so we would be wary of the impact of QE tapering on infrastructure projects in these countries.5 348.620 1. In addition. The fact that the window has been open has also encouraged a pick-up in refined metal imports.075-tonne and 60. This fall and the supply surplus look odd but. Page | 51 .000 tonnes of cancelled warrants.500 tonnes so far this year.89 million tonnes this year and a further five percent to 13.5% +12.and third-tier cities. encouraging China to import more concentrates.0 353 677 Change -Fd% +16.Quarterly Metals Report Zinc October 2013 even if it is concentrated in second. So far India. In the US. The latest ILZSG forecast for global zinc demand is for growth of 4.

Global supply/demand balance in refined zinc (thousand tonnes) 2009 2010 2011 2012(f) 2013(f) 11. although there might be spikes above that level should short-covering rallies be triggered.593 13. In the absence of this outturn. In turn. which may well mean either consumers are restocking. For the fourth quarter we are looking for a range of $1. it looks as though the market is keeping roughly in balance.020 10. we expect prices to remain rangebound. the press is awash with reports of long term price increases in zinc on the back of expected mine capacity closures.470 13. which in turn will start to correct the imbalance in the market and lead to a healthier outlook. we would not be surprised if less financing is done next year. we would expect a period of lower prices.920.Quarterly Metals Report Zinc October 2013 Shanghai Futures Exchange (SHFE) warehouse stocks stood at 250 . below there we would expect either production cuts or more support in the form of strategic buying from China to protect its zinc industry. The combination of a pick-up in refined imports and a drawdown in SHFE stocks suggests stronger apparent zinc consumption in China. peaked at 329.932 12.890 +366 +247 +374 +251 +130 $1. this is likely to boost availability.950 Sources: ILZSG. we feel prices will at some stage break below $1.850-2.159 $2.915 Production Consumption Balance Price 2014(f) 13.000. which could then boost availability.948 $1. Given that the broader economic data is still not registering a major pickup in industrial activity.800. In such a scenario. Balance With the ILZSG registering only a small surplus in the first seven months of the year and exchange zinc stocks falling (although the fall in LME inventories is likely to represent metal going into financing deals).896 13.191 $1. These influences are likely to be proven effective too far into the future to affect prices over the next quarter.649 12. This raises the question of whether there has been a more concerted pick-up in global demand.000 and an average of $1.they started the year at 310. FastMarkets forecasts Conclusion Zinc prices have found good support around $1.342 12. leading to a structural deficit in the market.717 tonnes early in October . which would then bring about a supply correction. we feel zinc will remain balanced for the rest of this year and into 2014 although there is a risk that the ability to continue to finance metal will diminish. which might then trigger a pick-up in investor interest and higher prices.404 tonnes in early March and have since drifted lower.080 12. Having been in a surplus for seven years and with the regulatory focus on financing deals and banks’ involvement in physical commo dities. that consumption is finally picking up or that the SRB is restocking.298 12. For 2014. with an average of $1.800.915 for the year as a whole.659 $2. with producer selling capping the upside around $2.706 12. we feel the drawdown may well be strategic buying to help underpin prices. Overall. Looking longer term.731 tonnes. Page | 52 . plus the likelihood of QE tapering draining liquidity and raising the cost of corporate borrowing.400 +70 $1.

their keenness to export is weighing on prices too. this would put full-year production at 1. which means producers should be able to respond quickly to any increase in demand. Summary of outlook for 2014 Steel demand is expected to grow moderately in developed markets and in China. In the first eight months of the year cumulative production was 1. Production remains in oversupply and capacity utilisation rates are generally low. especially if prices turn lower again.557 billion tonnes. although we are concerned that the contagion from QE tapering may well hit demand growth in other emerging markets. according to the World Steel Association (WSA).more to the point . according to the WSA. But the market remains in a supply surplus and .1 percent on with the same period of 2012.05 billion tonnes. Current situation Crude steel production peaked in May and has since been trending lower.Quarterly Metals Report Steel October 2013 Steel Introduction World steel production has been expanding at a rate of around 3. With domestic steel mills producing more than required. So there is still room for production cuts.0 percent this year and next. On a pro rata basis. Page | 53 .1 percent so far this year and forecasts are for global demand to increase by around a similar percentage.overcapacity threatens to keep prices under pressure. although new capacity is also being brought on line at the same time. however. production is expected to grow around 3. squeezing producers’ margins so some producer restraint is evident. up 3.1 percent as well to 1.475 billion tonnes this year. Forecasts are for global apparent steel demand to rise 3. Overall. The combination of lower prices and generally higher-than-expected iron ore prices is.

3 percent to 109. it does seem to be picking up again. in employment and especially in the auto industry. steel mills were operating at an average capacity rate of 78.87 million tonnes was at a capacity utilisation rate of 77. With the US Fed looking to start tapering QE. The slowdown in Brazil and Russia has eased.8 percent in Russia but it rose 4. with China accounting for 49 percent of global steel production. Conversely. Domestic producers.this is expected to hit GDP growth in these markets. which. we feel there is room for some pick-up in steel production. Capacity utilisation is expected to fall below 75 percent. the CIS. In emerging markets.2 percent in India.4 percent in Brazil and 2. face competition from foreign imports.8 percent.9 percent last year. The extent of the rise in Chinese production. while production growth in India has also slowed. apart from bouts of restocking.4 percent from 76. China’s State Council recently said it would cut 48 m illion tonnes per year of iron and steel capacity next year as part of its resolution to cut excess capacity and restore the steel industry to profitability. however.3 percent growth in Chinese output so far this year distorts the global picture. which in turn suggested destocking.5 -7. The combination of high inventories after restocking. look set to prompt some production restraint. In Europe. in the US. weak prices and relatively high iron ore prices. Indeed.8 percent in July. is likely to dent steel demand. So although production is lower than a year ago. compared with earlier data. in turn.183 million tonnes in the first half of the year. This would equate to some 6. production continues to fall.3 million tonnes in the first eight months of 2013. there has been a flight of capital from emerging markets . suggests that China has been restocking.2 percent. Supply outlook Although global supply is growing. while year-to-date production of 75. we feel there will be little upside pressure on prices. given the relatively low levels of GDP growth of around 7. it also highlights the extent of overcapacity. dropping 5. Output is generally lower in Europe. Indeed after a monthly average of 7. according to the WSA.output in the first eight months of 2013 fell in around 60 percent of producing countries compared with the same period of last year.0 percent of current output but it may be that the cuts are made from a combination of idle and active capacity. This is unsurprising given apparent demand growth of just 2. the picture at the individual country level is very mixed . Indeed. some Asian countries and China are seeing growth.Quarterly Metals Report Steel October 2013 With iron ore prices also expected to trade at lower levels next year. the 9. while some Middle Eastern countries.2 percent in the week ending October 5. output averaged 7.42 million tonnes in July and August. According to the American Iron and Steel Institute. South America and Oceania. Overall global steel capacity utilisation fell to 75. where economic activity has picked up and there have been some improvements in the construction market. Although this shows producers are reducing output. production in the first eight months was down 1. Page | 54 .

as QE is reined in. steel and aluminium industries.5-7. Chinese growth apparently stabilising around 7. Conclusion The steel market remains well supplied . while the march of urbanisation continues. While we are more bullish for US demand. to 1. still. which should allow for a more stable base from which demand can start to recover. A hard landing in China and further declines in Europe now seem less likely. although the government is redirecting funds away from some projects.1 percent in 2013. Next year. will account for the majority of global growth growth in the rest of the world is only expected to be 0. tackling the shadow banking industry and clamping down on local government misspending in areas where there is already overcapacity. In China.Quarterly Metals Report Steel October 2013 Demand outlook The outlook for steel demand is for a rise of 3.3 percent to 1. which is expected to grow 6. means there is still a lot of uncertainty as to how 2014 will pan out. Needless to say. according to the WSA's October forecast. the potential for further calls for budget cuts to lift the US debt ceiling early next year and contagion in emerging markets from reduced liquidity. With the US leading the way in terms of economic recovery. such as the railways and infrastructure in general.7 percent. it is boosting investment in other areas. Page | 55 .0 percent in 2013. it expects apparent consumption to rise a further 3. we would look for HRC prices to average around $640 per tonne. such has the tapering of QE in the US. In addition. Demand is expected to remain subdued for the rest of this year and into 2014. emerging markets are potentially strong areas for growth in infrastructure spending but capital flight is likely to see projects cancelled. which in turn will keep prices in check. For 2014. We see the main risk from a slowdown in demand growth in emerging markets as the liquidity in the global market is reduced as US QE is first tapered and is then reined in.so any pick-up in demand can initially be satisfied by drawing down inventories and then by boosting capacity utilisation rates. How emerging markets cope with lower foreign direct investment as QE is first tapered and then reined in will be a key area of note. China’s steel demand. the new government seems prepared to accept slower growth. it alone is unlikely to produce a strong global steel market and stronger demand in the US will likely attract imports.8 percent and Europe also showing some stability. which could undermine demand next year. which includes the cement. How strong apparent demand actually turns out to be will to a large extent depend on whether confidence grows enough to prompt restocking.0 percent as the aforementioned lull takes hold.475 billion tonnes. we are wary that structural issues.indeed. This may slow growth in steel consumption but. demand in China is expected to grow at a slower 3.523 billion tonnes. the outlook for steel demand in developed markets and in China could turn out to be fairly robust. For 2013. it is oversupplied . it is difficult to be bearish for steel consumption in China although there may be some lull in demand as investment shifts between those areas where the government wants to invest and the areas where they want to reduce investment.

451 3.467 822 1.731 1.545 80.503 10.195 1.064 4.183 1.587 Aug-11 12. America S.147 81.592 3.902 9.622 1.197 1.594 3.029 9.103 74.958 Jun -2013 14.915 83.745 131.798 124.075 8.665 Jul-11 14.253 122.172 8.710 84.173 77.694 3.628 3.964 9.035 9.288 1.061 1.308 75.East Jan-11 14.797 3.188 72.815 Mar-2013 14.850 4.574 129.131 9.723 Apr-11 15.876 4.31 9.705 Jun-12 14.824 3.625 Apr-12 14.674 Jul -12 14.202 1.447 9. America Africa Mid.688 85.771 Feb-2013 13.087 3.122 3.680 123.243 9.191 1.295 9.884 88.763 3.494 80.404 9.848 1.095 90.839 3.027 9.402 128.845 126.727 9.711 9.935 3.025 1.472 3.688 9.819 90.859 3.641 Dec-11 12.214 136.014 3.584 10.200 1.802 Feb-11 14.976 87.778 78.191 3.060 9.463 10.959 1.918 10.313 129.887 83.206 1.348 3.108 83.747 3.837 1.234 1.126 9.509 131.721 3.935 1.615 10.330 84.795 1.097 121.174 9.007 4.739 9.716 9.351 Page | 56 .668 129.730 9.074 1.278 10.093 4.698 Feb-12 14.176 1.681 Nov-11 14.526 3.909 May-2013 14.736 May-12 15.982 123.884 Apr-2013 14.160 3.968 132.293 129.251 78.580 9.390 82.252 1.910 3.688 88.781 3.402 9.058 123.172 10.199 1.666 9.449 3.880 1.718 Jan-12 14.250 10.885 3.180 1.065 10.048 1.809 127.624 9.928 Jul-2013 13.244 9.249 9.726 May-11 16.167 1.952 Source: World Steel Association Others 3.693 123.191 9.758 3.799 130.830 1.280 1.134 3.302 130.617 8.865 10.570 10.661 Oct-11 15.890 1.506 3.781 82.495 9.769 3.971 81.957 9.795 79.747 80.862 Total 127.404 Aug -12 12.280 8.193 1.511 9.731 120.857 132.302 1.014 134.385 3.407 9.990 118.406 86.773 3.759 1.217 1.949 9.961 Aug -2013 12.186 1.541 9.925 8.677 Sep-11 14.207 1.925 10.421 1.798 3.634 Nov – 12 13.494 3.948 127.318 10.730 Mar-11 16.802 3.267 1.681 121.925 4.588 4.064 9.832 1.376 3.260 124.217 1.103 1.919 9.965 1.181 1.955 83.123 1.584 3.234 81.621 3.640 Jan-2013 13.102 1.711 Jun-11 15.589 Sep -12 14.221 1.034 9.234 1.191 1.039 82.582 3.630 3.673 125.696 3.229 4.Quarterly Metals Report Steel October 2013 Crude steel production (thousand tonnes) EU 27 CIS -6 N.853 4.148 9.661 Mar-12 15.458 3.244 Asia 83.057 9.684 4.306 88.510 8.642 Oct – 12 14.523 3.193 1.605 9.423 3.204 1.090 1.659 Dec -12 11.206 1.131 4.780 3.234 1.772 3.836 1.191 1.242 4.541 9.448 10.779 1.746 1.635 3.603 1.490 3.140 9.224 1.837 1.181 1.455 115.100 3.353 3.282 9.566 3.581 79.944 1.759 3.341 127.506 117.074 1.460 10.900 10.

That said. after inventories at Chinese ports reached a four-year low in March and as the demand outlook for steel stabilised following earlier concerns about a hard landing in China subsided.the cost of production outside China is considerably lower. The recovery in China’s manufacturing PMI data helped prompt this turnaround but steel output in China seems to have run ahead of demand so steel production rates may have to drop again. iron ore prices should start to fall . while Chinese production is still required. Summary of outlook for 2014 With global iron ore production being ramped up. We expect iron ore prices to continue to oscillate but we also expect the trading range to narrow and to hold around lower levels. while the need for high-cost Chinese iron ore eases to balance supply and demand. In addition. after the destocking run from February 2011 to September 2012. but that was turned on its head when China took advantage of the sub-$100 per tonne price for 62% Fe CFR China to restock. especially given disruptions to supply from strikes and adverse seasonal weather patterns. prices are unlikely to hold below $100 for any length of time. the market is dynamic.Quarterly Metals Report Iron Ore October 2013 Iron Ore Introduction Iron ore prices have swung quite wildly in recent quarters. prices will be supported around $100-110. With China accounting for around 60 percent of the seaborne iron ore market and with its high cost domestic production acting as a swing factor. Page | 57 . more low-cost iron ore is likely to be made available to the seaborne market. with global economic growth subdued and the steel industry oversupplied. steel production cuts are likely and that is also likely to keep iron ore prices in check on the upside. the outlook had turned quite bearish for 2013. Prices have since oscillated between levels around $110 and $155. Supply and seaborne trade outlook Seaborne supply and Chinese demand for iron ore generally set the iron ore price. Current situation The recent run-up in prices has once again been driven by Chinese restocking. Since Chinese iron ore is at the top end of the cost curve. which in turn may well keep prices more rangebound around lower levels in the years ahead. with the swings tracking phases of destocking and restocking by China. the likelihood that seaborne supply will be insufficient to satisfy Chinese requirements will mean the market will have to tap Chinese iron ore to balance the market. Conversely.

higher-cost Chinese domestic ore. pressure to reopen the export market may grow. Once global economic growth look sets to recover. led by the US followed probably by China later next year. We expect demand for iron ore to remain robust overall .0 percent in 2013 to 1. Falling iron ore exports from India in recent years . Although there has been some iron ore restocking in China in recent months. The accelerated increase in iron ore production next year is expected to shift the market to a surplus from a supply deficit. the lower the need for the price-setting.3 percent this year and next year respectively bodes well for seaborne demand. but beyond that we feel the outlook for iron ore demand is strong.the result of resource nationalism. there may well be room for a significant pick-up in steel demand as more concerted economic growth is seen. This rate of growth is slightly higher than the expected 3. If these face illiquidity issues or must raise interest rates to protect their currencies. stocks are not overly high. India accounted for 21 percent of China’s iron ore imports. China remains the balancing factor in supply and demand although with developed economies in recovery mode a pick-up in demand for iron ore outside of China should also help support prices. supply is expected to increase around 6.0 percent. this figure dropped to one percent last year.5 percent to 2. Page | 58 .have limited the amount of iron ore available to the seaborne market. In 2014.Quarterly Metals Report Iron Ore October 2013 Iron ore supply from Australia’s three largest iron ore producers .1 percent growth in steel production. Overall. economic growth could slow and less foreign direct investments could potentially see investment in infrastructure projects cut. Globally.there may be a drop in demand in emerging markets if there is a liquidity crunch next year. After years of high compound average growth in the country. up from a scheduled 306 million tonnes this year. Demand outlook The combination of a forecast increase in global steel production of 3. while steel production is expected to grow around 3. it may also relax restrictions on iron ore exports.is expected to increase 34 million tonnes in the fourth quarter compared with the same period last year and 12 million tonnes compared with the third quarter of this year. The overall outlook is for iron ore supply to grow at a faster pace next year and for the market to move into a supply surplus for the first time since 2010. while growth in China is seen stabilising.it aims to produce 480 million tonnes in 2018. Vale is also stepping up production . Another phase of destocking could start if iron ore prices start to fall but prices generally seem to be holding up well for now.10 billion tonnes. In 2007. If the government is happy to restrict imports of bullion to help address the trade deficit. iron ore production is expected to increase around 4. Economic growth in the US is expected to recover slowly in the months ahead. even growth of 7-8 percent still means a lot more volume is needed each year so we find it difficult to be bearish on Chinese steel consumption. BHP Billiton and Fortescue Metals Group . characterised by exports bans and 30 percent export tariffs . The more seaborne ore makes its way to China.Rio Tinto. The one area of concern is the impact of QE tapering on growth in emerging markets. Given India's current account deficit crisis.98 billion tonnes.1 percent and 3.

There may be spikes outside of this range but we would expect them to be short-lived. In the fourth quarter we would look for a range of $120-138. we are looking for iron ore prices in 2014 to trade in a range of $95-100 at the lower end and $130-135 at the upper end. we feel the swings will become less amplified and prices will hold in a tighter and lower range. Page | 59 .Quarterly Metals Report Iron Ore October 2013 Conclusion The iron ore market has had some large swings in prices in recent years but while seaborne supply increases and steel consumption is likely to remain subdued. Overall.

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