Authored by Alireza Moghaddam, Chairman, AMIDT Group
The basic metal index gained almost 8% since the start of 2017 that indicated confidence in the fundamental basic metal trends. Confidence in the copper market remains tepid, while the outlook for the aluminum, zinc and nickel markets is brighter. The strong upward trajectory was mainly fuelled by a vigorous recovery in metal end-using sectors and optimism about the rest of the year.
Non-ferrous markets have their own regional dynamics and much depends on the supply of scrap metal. In the US, the scrap markets are in thrall to the upcoming elections and their ensuing impact on the economy. The prevailing mood of uncertainty is putting a damper on activity. In the EU, there is a sufficient supply of non-ferrous metals. Moreover, end-user demand is relatively weak and stocks are high. The uplift in LME prices – notably for aluminum, nickel and zinc –offers some solace for the market as trends in non ferrous metals’ prices and LME prices run almost in parallel.
A slowdown in China’s economy has led to a surge in metals from aluminum to zinc flooding world markets, triggering a rise in trade tensions from the US to Asia. While on the domestic front, gradual increase in the demand for non ferrous metals in expected. The first half of FY2017 can expect a positive outlook in the market.
Mine production of zinc fell by 1.8 percent in 2016 compared to 2015 mainly due to the reduction of production in Australia, India, Ireland and Peru which was not affected by the increase in Bolivia, China and the Russian Federation. There is growing concern over current suppliers of zinc who may have an increasing problem of maintaining supply. It has been estimated that in 2017 may disappear over 1.2 million tons of annual zinc production. Global demand for zinc amounts to approximately 13 million tons per year. High consumption of zinc has been observed in the steel industry which is not directly related to non-ferrous metals market. Zinc is used as an anti- corrosion coating, especially for steel sheets.
International Lead & Zinc Study Group suggests the excess demand for zinc, which will increase by 1.98 million tons in 2017. From the beginning of 2016, the rate for zinc rose by 78 per cent in February 2017 and was the highest rate of all the listed non-ferrous metals.
The global balance for refined copper in 2016 as given by the International Copper Study Group, notifies that demand will exceed supply by about 56 thousand tons. World demand for this metal is about 23 million tons.
China generates about 40 percent of global copper demand and having that in mind the condition of the economy in this country has the largest impact on the price of this metal. In the long-term demand for copper in China should be reinforced by investments in the sector of renewable energy and the need to reduce pollution in large cities.
In the meantime, production of refined copper has kept pace with demand in the subsequent months of 2016. International Copper Study Group has estimated oversupply by 160,000 tons in 2017. Nevertheless, copper prices have risen by 28% in the first half of 2017.
Aluminum is used in virtually every industry, thus increasing its consumption year after year. According to forecasts by the International Energy Agency, between 2003 and 2030 demand for aluminum will increase by more than 50 percent, due to the rapid development of LED lighting and the development of the automotive industry.
According to research by McKinsey & Company, the latest market share of LED lighting industry for Europe, Asia, and North America amounts to 7 per cent but it is expected to increase up to 70 percent in 2020. In the European Union, this increase could be even greater due to the EU directive which started withdrawing traditional light bulbs from the lighting market in favor of more environmentally friendly lighting. Therefore, there is also expected strong growth in consumption of aluminum in this industry.
Despite the modernization of technological processes, aluminum production is still energy consuming. It is important to remember that the energy consumption used to produce 1 ton of primary aluminum is four times higher as compared to the production of one ton of zinc and, moreover, it is sixteen times higher than in the case of production of 1 tonne of electrolytic copper.
Global production of aluminum currently amounts to about 58 million tons. The rate of aluminum is steadily increasing since the beginning of 2016 and has increased by more than 20 percent in the first half of 2017.
Growth in the consumption of aluminum, copper and zinc has remained healthy in the first half of the financial year 2017 at ~16%, 11% and ~6% respectively on account of healthy demand from the power transmission and distribution and automobile sectors. ICRA’s outlook on the long term demand of base metals in India will remain positive, driven by investments in infrastructure projects for the power transmission and distribution sector, urban housing and smart city programs.
The differences relate to the scale of expected exchange rate movements, while it is worth mentioning that increase in case of zinc from the beginning of 2016 is now almost three times greater than in copper and almost four times higher than that of aluminum. We are expecting to see a gradual increase in the demands for non-ferrous metals in the first quarter of 2017.