Base metals and mining industry outlook: 2016
Prices, across the board, are lower intra-year and range from a 12 percent drop for lead to a 34 percent fall for nickel, and while we acknowledge that there is plenty of scope for negative sentiment as global growth fears remain, we have started to look for turning points. The rate of recovery, of course, will vary from metal to metal but fundamentally, we are most bullish on nickel, least bullish on aluminium.
The corporate sector, naturally, has fallen lock-step with the slump in prices. The top ten miners have a combined market value of just over $280 billion which is roughly half what it was some 12 months earlier and almost a quarter of the reading at the peak of the super-cycle in early 2011. Overall, the landscape for the mining sector looks rugged. The clock has turned back commodity prices and revenue to levels last seen in 2008/09, while over the same period debt on the combined balance sheets of the ten miners is more than 50 percent higher. Free cash flow is holding up, but only thanks to drastic cuts to capex, which will partly impact mining flexibility and future growth plans.
• Nickel prices expected to rise nine percent as constraints limit supply whilst demand grows.
• With falling surplus, copper prices to grow four percent on annual average basis, with expectations of significant growth towards the end of 2016.
• Aluminium prices set to struggle as output continues to increase, with expansion of lower cost capacity in China.
• Lead also expected to struggle in 2016.
• Zinc market continues to disappoint currently as deficit fails to materialize again despite mine closures.
It is in this regards that further downside to commodity prices will be much tougher to absorb. The result will be, in our view, better discipline on the supply side with meaningful cuts to marginal cost production which should provide support prices for a number of the base metals. Furthermore, project deferrals and capex cuts will dent future supply growth, and while sentiment remains firmly negative, we are sowing the seeds for the next mining boom, as supply, once again, falls out of sync with global demand growth, albeit at a slower pace this time around. We look forward to substantial price hikes in the medium term, but as for 2016, it will be a largely muted affair, as the rebalancing continues.
Nickel the standout in 2016, but it’s a field of weak runners
The nine percent increase we forecast for nickel prices next year is predicated on further supply constraint that will coincide this time with stronger consumption from the key stainless steel sector. Demand has been knocked by a prolonged destocking cycle that began in late 2014 and continued into the early months of this year to more than counter lower supply, leaving the market in a forecast 40,000-ton surplus in 2015.
Considerably more than half of the world’s nickel producers are estimated to be losing money, however, and further curtailments look set to come through that will tip the market into a 30,000-ton deficit. While this is unlikely to set nickel alight given that it will make only a small dent in the continued vast inventory overhang, industry watchers will be heartened by the fact that its fundamentals will be moving in the right direction, with further deficits foreseen in subsequent years.
Copper close to bottom
The copper market is close to bottoming out and we expect it to finally turn the corner next year as the surplus contracts to a little more than 100,000 tons. While prices will improve only marginally by four percent on an annual average basis, the gradual upwards slope will see them end 2016 substantially higher than present levels.
While we have been somewhat cautious on the extent to which recent price-related production cutbacks to date will impact copper supply, they will help to reduce the expected surpluses this year and next. Furthermore, as miners continue to react to current weak prices, further supply response is expected, indicating a return to deficit from 2017. Global copper demand growth, which has been crimped to little more than two percent this year will also play a greater part in improving market fundamentals, helped, despite a degree of caution on the figures bandied around, by investment in China’s power network, as well as by the One Belt One Road policy.
Others to disappoint…again
The prospects for aluminium, zinc and lead in 2016 look comparatively less inspiring than those for copper and nickel. The former will continue to be plagued by the seemingly relentless rise in output. While we are building in slower supply growth next year than this year’s hefty 7.4 percent forecast, which has been fuelled by continued strong expansion of lower cost capacity in China, this will still leave the market in around a half a million ton surplus. With no sign of deficits on the horizon in the medium term, weak prices remain the order of the day for this metal.
The zinc market has had to contend with disappointment yet again that the closure of some of the world’s biggest mines is not going to result in a substantial deficit again next year and this is reflected in an expected 7.7 percent decline in prices this year, to be followed by a mere 1.5 percent increase in 2016 to $2,030/ton. The shortfalls forecast for this year and next pale into insignificance in light of both visible and “invisible stocks.