Copper, Nickel riding on sentiments: Nirmal Bang

Global risk sentiments have been better since the start of 2013 as compared to 2012. Better economic data points from USA, China and Japan has encouraged buying in riskier assets. Also, a continuation of accommodative monetary policy by the US Federal Reserve and major liquidity approval by the Bank of Japan supported global financial markets. In the midst of these positive developments, we need to check the ground realities when it comes to making a choice of investing in a particular asset.

In our view, though prices of copper and nickel have been relatively higher since the start of 2013, the fundamentals of these two metals in particular have not improved much.

Copper

Copper prices traded relatively closer to its mean in 2012. Being an indicator of global economic health, growth concerns due to slowing Chinese economy and optimism owing to liquidity defied prices to trade at extremes for a longer duration. Copper prices ended about 5% higher in 2012 compared to prices ending in 2011. However, since the start of 2013, copper prices have been about 4% higher.

The magnitude of tightness in copper seemed to have eased over the year 2012. Slowing Chinese economic growth has led to reduced demand growth in 2012.

Yet, refined copper production growth remains in line with expectations on account of increased refined copper output from China. Hence, on a broader yearly perspective, we estimate a balanced market for copper for 2012.

However, in 2013 we expect further refined production growth on account of rampant production from China and increase in global SX-EW production. Similarly, we also expect demand to pick up as things look gloomy from the US and European nations and growth rate in China too seems to have bottomed out for the moment.

Also, investment demand from ETFs is likely to further draw up metal from the markets. We expect global copper demand to grow at 4.3% in 2013. Hence, we expect copper market to be in a small deficit of 90,000 tonnes for 2013.

Chinese Trade

China remained the highest consumer and importer of the red metal in 2012. Though refined metal imports have been declining after peaking in December '11 and throughout Q1 2012, imports of refined copper by China have been steady in the last two quarters of 2012.

Chinese refined copper imports in the first 11 months of 2012 were 30% higher than total imports in the first 11 months of 2011.

Refined copper output remains at record high levels throughout the year. China produced the highest amount of refined copper in November '12. Chinese refined copper production in the first 11 months of 2012 was 8% higher than the production amount in the first 11 months of 2011.

Major Recent Developments

Copper ETFs

After being stuck in the approval process for two years, JP Morgan's hotly debated XF Physical Copper Trust exchange-traded fund finally received the green light from the US Securities and Exchange Commission (SEC). Currently, the SEC is also in the final stages of approving another physically-backed copper ETF from BlackRock, the world's largest fund manager. The investment vehicle would be an exchange-traded fund (ETF) backed by an inventory of physical copper. However, some copper manufacturers and merchants wrote to the SEC opposing the planned ETF, saying it would hurt the industry by locking up too much copper in the investors' hands.

Financing Deals

Some banks in China have tightened credit for imports of refined copper. With domestic prices in China staying below the London Metal Exchange rates, coupled with rise in stockpiles in bonded warehouses and squeeze of physical premiums, local banks are finding more risk in lending against copper stocks. Chinese banks suffered a huge setback after falling into similar trade in steel as they failed to recover billions of yuan in loans. Hence, to avoid similar kind of losses in copper they have tightened some measures for the same.

Nickel

Nickel has been an underperformer in the non-ferrous complex. In the year 2012, nickel prices have fallen more than 8%. Surplus supply of the metal, backed by strong substitute demand for nickel pig iron has pressurized prices throughout the year. However, since the start of 2013 prices are about 7.5% higher.

Global nickel has been in surplus in 2012. Slowing demand from stainless steel makers on account of major substitution of nickel pig iron dampened demand for the metal. Producers are responding to the slowing demand by reducing production levels. Hence, low growth in demand has been followed by an equivalent slow growth in supply. We expect nickel supply to slow down further going into 2013 as many producers are finding production non-profitable at the prevailing LME rates.

The demand is believed to have slowed down in 2012 on account of slowing Chinese economy and major threat from nickel pig iron producers in China. However, we expect demand to pick up on account of increase in demand from stainless steel manufacturers as infrastructure spending in China is set to pick up.

Nickel LME Inventory

Nickel inventory held at major LME warehouses have been continuously rising after the lows of 2011. Ending December '12 inventories amounted to 1,41,690 tonnes compared to 90,516 tonnes ending December '11. Inventories rose about 56% in 2012. Slowing Chinese economy, coupled with low demand from stainless steel makers and growing NPI production can be attributed to such a situation.

Conclusion

Improvement in macroeconomics with respect to better economic data from the US, China and Japan, coupled with high amount of liquidity by major central banks has resulted in investment in riskier assets. More than fundamentals, expectations of global recovery in copper prices have inched high and nickel, which was an underperformer in 2012, moved up by 7% in one-and-a half months. However, from a micro supply-demand point of view things don't seem to be encouraging for investors. In our view, a pull back in prices is on the cards, looking at the current supply-demand situation, substitution problems and developments of the underlying metals. More than fundamentals, sentiments and expectations of stability are seen driving the prices of copper and nickel.

Source: Nirmal Bang's Beyond Market

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