20140526-BMO-Global_Commodities_Research_evising_Iron_Ore,_Nickel_and_Copper_Price_Forecasts_Following_China_Research_Trip_15页_709kb

Global Commodities Research Summary

Core Content Overview

This document provides an analysis of the revised price forecasts for iron ore, nickel, and copper following a research trip to China. It outlines the impact of China's economic conditions, policy changes, and industry dynamics on the global commodity markets.

Main Points

China's Economic Context

• China's Q1/14 GDP growth was 7.4%, slightly lower than 2012 and 2013 but relatively stable.
• Housing starts declined by 22% year-on-year, indicating weaker demand for construction-related commodities.
• Transportation and consumer spending are noted as positive demand drivers for commodities.

Iron Ore

• Demand assumptions remain unchanged, with steel output increasing by 3.6% year-on-year in January-April 2014.
• Supply growth has been revised upward due to Rio Tinto's expansion and other sources.
• Price forecasts have been revised down: US$109/t for 2014E and US$108/t for 2015E.
• Price support is estimated around US$105/t (real) due to the cost curve and reduced supply from high-cost private mines.
• SOE production may decline in 2016E as loss-making operations become unsustainable.
• Global surplus is expected to continue, with iron ore prices likely to be dragged down by market expectations of oversupply.
• Rail freight rates are expected to rise, which could impact the cost curve and price support.

Nickel

• Price forecasts have been increased due to delayed refinery projects in Indonesia, estimated to take 4 years instead of 2.
• Inventory levels are declining rapidly, which could push prices above marginal costs by 30% in 2015-16E.
• Indonesian export ban is reducing supply, with 250ktpa of production lost, and NPI is a major input for stainless steel.
• China's reliance on NPI is significant, with 84% of stainless steel production using it in 2013.
• Refined nickel imports have remained steady, but scrap substitution and Indonesian exports resuming pose downside risks.
• Smelter supply is expected to grow, but technical risks remain for new facilities.

Copper

• Housing starts have declined by 22%, which negatively affects copper demand, especially in construction.
• Demand growth for copper in China is revised to 3.9% from 5.5% due to weaker housing activity.
• Transportation and consumer sectors are expected to offset some of the demand decline.
• Auto sales are growing at 10%, supporting copper demand.
• Government incentives for electric vehicles may offer a long-term demand boost.
• Copper smelters and refineries are less affected by credit constraints than other industries.
• Price forecasts have been revised downward: US$3.13/t for 2014E and US$3.05/t for 2015E, with US$2.90/t for 2016E.
• Global surplus is expected to remain, with copper consumption growing steadily but at a slower pace.

Key Information

Iron Ore

• 2014E price forecast: Revised from US$120/t to US$109/t.
• 2015E price forecast: Revised from US$115/t to US$108/t.
• Cost curve support: US$105/t (real).
• Supply growth: Expected to increase due to expansions in Australia and Brazil.
• SOE production: May start to decline in 2016E due to unsustainability.
• Global supply: Expected to grow from 2,094Mt in 2014E to 2,284Mt in 2018E.
• Global consumption: Expected to grow from 2,043Mt in 2014E to 24,549kt in 2018E.
• Global surplus: Likely to remain positive in 2014E and 2015E.

Nickel

• 2014E price forecast: Revised from US$7.10/t to US$8.13/t.
• 2015E price forecast: Revised from US$8.00/t to US$11.50/t.
• 2016E price forecast: Revised from US$9.00/t to US$13.00/t.
• Indonesian refinery projects: Delayed, with an estimated 4 years to develop.
• Global supply: Expected to decline from 1,668kt in 2013 to 1,926kt in 2014E.
• Global consumption: Expected to increase from 1,823kt in 2013 to 2,226kt in 2018E.
• Global surplus: Expected to be 1kt in 2014E, turning into a deficit by 2015E.

Copper

• 2014E price forecast: Revised from US$3.20/t to US$3.13/t.
• 2015E price forecast: Revised from US$3.10/t to US$3.05/t.
• 2016E price forecast: Revised from US$2.90/t to US$2.90/t.
• Demand growth: Revised to 3.9% in 2014E from 5.5%.
• Global supply: Expected to increase from 16,033kt in 2013 to 22,940kt in 2018E.
• Global consumption: Expected to increase from 19,606kt in 2013 to 24,549kt in 2018E.
• Global surplus: Expected to remain positive, with 358kt in 2014E and 66kt in 2018E.

Summary of Forecast Revisions

Commodity	2014E (Previous)	2014E (Revised)	2015E (Previous)	2015E (Revised)	2016E (Previous)	2016E (Revised)	2017E (Previous)	2017E (Revised)
Iron Ore	120	109	116	108	112	112	114	114
Nickel	7.10	8.13	8.00	11.50	9.00	13.00	10.00	11.00
Copper	3.20	3.13	3.10	3.05	2.90	2.90	3.00	3.00

Risks and Outlook

Upside Risks

• Stronger-than-expected steel production for iron ore.
• Structurally higher costs for nickel due to beneficiation.
• Electric vehicle incentives for copper in the long term.
• Increased demand from transportation and consumer sectors.

Downside Risks

• Indonesia restarting nickel exports.
• Greater scrap substitution in stainless steel production.
• Lower-than-expected demand from housing and construction.
• Increased global supply and inventory build for iron ore.

Conclusion

The revised forecasts reflect a more cautious outlook for iron ore and copper due to weakening demand from the housing sector, while nickel shows a more optimistic trajectory due to delayed supply and declining inventories. The research highlights the importance of China's economic policies, supply adjustments, and global market dynamics in shaping future commodity prices.