Base Metals Outlook...LME 3M 2015 2016 2017 1Q18 2Q18 3Q18 4Q18 2018 2019 2020 ... but the base...

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Base Metals Outlook

Mind the gap

June, 2018

ICBC Standard Bank |

Contents

Base Metals Outlook

Mind the gap 3

Summary Views 5

Copper 7

Aluminium 15

Nickel 22

Zinc 29

Lead 34

2

Commodities Strategy

This is a marketing communication which has been prepared by a trader, sales person or analyst of ICBC Standard Bank Plc, or its affiliates (“ICBCS”) and is provided for informational purposes only. The material does not constitute, nor should it be regarded as, investment research. It has not been prepared in accordance with the full legal requirements designed to promote independence of research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

1

Overview:

Mind the gap


US$/t

LME 3M 2015 2016 2017 1Q18 2Q18 3Q18 4Q18 2018 2019 2020

Al 1,681 1,611 1,980 2,160 2,300 2,200 2,250 2,228 2,250 2,300

previous 2,200 2,100 2,100 2,200 2,150 2,200 2,250

Cu 5,493 4,870 6,197 6,997 6,900 6,750 6,900 6,887 7,250 7,750

previous 7,100 7,250 7,250 7,500 7,275 7,500 8,000

Pb 1,794 1,875 2,324 2,517 2,400 2,300 2,300 2,379 2,250 2,200

previous 2,600 2,750 2,750 3,000 2,775 2,650 2,500

Ni 11,877 9,648 10,459 13,319 14,500 14,750 14,750 14,330 15,000 16,000

previous 13,250 13,250 13,500 13,500 13,375 14,000 15,000

Zn 1,938 2,101 2,888 3,390 3,150 3,000 3,000 3,135 3,000 2,800

previous 3,450 3,500 3,500 3,600 3,513 3,300 3,000

Previous - February 2018

Actual Forecast

Mind the gap

H2 soft patch in Chinese demand...

● Demand for base metals has largely been solid in Q2. Through Q3,

however, we think Chinese demand will soften as the lagged effect

of credit tightness is felt more meaningfully.

● The pace of economic expansion is stuttering elsewhere, with

slower growth indicated by recent data in Europe and Japan. Not to

mention that trade tensions are adding to geopolitical risk.

● Nevertheless, base metal prices have been relatively robust in the

face of patchier economic data and a loss of some confidence in

the synchronised global growth story that so buoyed sentiment in

H2 2017.

● But after the current run higher, we see the likelihood of some

price weakness in Q3, with the key risk being softer Chinese

demand, compounded by trade disputes and near-term dollar

strength.

…but the base metal bull market is far from over

4

Base Metals Outlook Commodities Strategy

● We do not believe that the Chinese authorities will overtighten

financial conditions. Ultimately, sufficient credit will be available to

support real economic activity, as demonstrated by the recent RRR

cut. Nevertheless, we have shaved on average c.0.5% off our

Chinese demand forecasts for 2018..

● Into next year, our base case is that metal demand should remain

steady, including in China. We assume that global growth will not

be derailed by significant trade disputes but the tail risk of this

cannot be completely discounted.

● Other tail risks have also emerged, such as the potential for Italian

disruption to Eurozone stability, a consequent return to US dollar

strength as investors’ heavy overweight in the Euro is unwound,

and central banks – led by the Fed – getting ahead of nascent

inflation to lift real rates materially higher. All of these, however, fall

outside of our base case and we therefore tread a steady course in

our central forecast scenario.

● As we have argued over the past year, the outlooks for individual

base metals should also become more nuanced, governed not just

by macro but also their own fundamental micro-drivers.


Summary views

Most bullish on nickel; copper the best of the rest

● We have revised our nickel market deficit for 2018 to a shallower

46,000 tonnes. But this is still the largest projected deficit – as a

percentage of consumption – for any base metal this year.

● And we continue to see nickel’s fundamentals tightening, with

incrementally larger annual deficits as we move towards the start

of the next decade.

● Copper will follow, though our latest revisions have this market

starting from a balanced position in 2018-19, with deficits

returning thereafter.

● This means prices for both nickel and copper should continue to

appreciate through our forecast window.

● We would expect dips to be supported, as buyers anticipate tighter

supply-demand balances in the future.

Still constructive but balances less tight this year

● The outlook for base metals over our forecast period to 2020

remains constructive, defined by stable – if unspectacular – global

economic growth, nascent inflation risks, and varying degrees of

supply shortage.

● But we think the balances will be less tight this year than last,

given the aforementioned soft patch in Chinese demand in H2 and

the year-to-date absence of significant supply disruptions.

● The EV revolution adds an additional element of bullishness to the

outlook for some markets, especially nickel, but also copper to a

certain extent. We are clearly in the early stages of this

technological shift and would reiterate that, with many moving

parts and hurdles to be overcome, it will be some time before we

can be confident about the exact metal market impacts of EV-

related developments.

5

Base Metals Outlook


●

Surplus/deficits as % of consumption

Source: MBR, ILZSG, ICSG, INSG, IAI, Company Reports, China NBS, Bloomberg, ICBC Standard Bank

2018 Chinese demand growth revisions

Source: MBR, ILZSG, ICSG, INSG, IAI, Company Reports, China NBS, Bloomberg, ICBC Standard Bank

-6

-4

-2

0

2

4

6

2015 2016 2017 2018 2019 2020

% o

f co

nsu

mp

tio

n

Copper Aluminium Nickel Zinc Lead

0%

1%

2%

3%

4%

5%

6%

7%

Al Cu Pb Ni Zn

February forecast May forecast


0

2

4

6

8

2013 2014 2015 2016 2017 2018 2019 2020

we

ek

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Zinc Lead

Summary views, continued

Hard to get overly bullish aluminium

● The evolution of the aluminium supply-demand balance has been

thrown into more uncertainty and could go either way in the

coming quarters. Indeed, the market is currently trying to navigate

multiply supply-side threats, including alumina tightness, China’s

clampdown on pollution and excess capacity, as well as US

sanctions and trade tariffs.

● Our base case envisages a near-balanced aluminium market out to

2020, albeit with small annual deficits rather than surpluses.

● But these deficits remain small compared to the scale of legacy

inventories. And there is still an overhang of spare capacity – some

of which is already being reactivated in China and the US – leaving

it hard to get overly bullish aluminium.

Lead and zinc heading back to balance

● We still see lead and zinc heading back towards fundamentally

balanced markets as supply increases.

● This means the scope for further price rises is relatively limited and

we expect 2017/18 to prove the peak for this cycle.

● That said, it is too early to jump to bearish conclusions, as

inventories remain very low and the meaningful surpluses needed

to replenish them are not yet on the horizon. That leaves both

markets vulnerable to shocks, such as supply setbacks.

6

Base Metals Outlook


●

●

● China’s ongoing aluminium surplus

Source: MBR, Antaike, China NBS, ICBC Standard

Pb & Zn stock to consumption ratios bottoming around 2 weeks

Source: MBR, ILZSG, Company Reports, ICBC Standard Bank

0

500

1,000

1,500

2,000

2,500

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

China Primary Balance

2

Copper: Reality check


Reality check

● The copper bull narrative is having something of a reality check this

year. Despite much discussion about potential supply disruptions

and optimism about the prospect of strong, synchronized, global

growth, the price is essentially flat ytd and has spent much of H1

down on the year.

● To date, not a single tonne of production has been lost due to

strike action this year, at least based on the negotiations we track

(see following slides).

● Nevertheless, despite 19 labour contract negotiations having

already concluded successfully, Escondida stands out as the

clearest risk of a major supply disruption. Having started early,

negotiations are ongoing, with the company as yet unwilling to

meet employee requests for a 5% pay rise and $34k bonus.

● Political risk has reared its head, with changes to the DRC’s mining

code, for example, raising questions about its attractiveness for

future investment.

● There have also been some noteworthy smelter disruptions, most

significantly at Sterlite’s 400kt/y Tuticorin plant in India. If the

concentrate is processed elsewhere, however, then smelter

disruptions like this can result in little or no net loss of metal units

to the market. And, led by Chinalco’s new 400kt plant, the second

half of 2018 will see significant capacity additions in China. This

should keep a lid on TCRCs.

● So, while keeping an eye on Escondida, we continue to take a

relatively benign view on supply disruptions this year. Specifically,

our base case still allows for an historically normal 6% of slippage,

rather than a higher – strike elevated – figure.

● But we have trimmed our demand outlook, softening our

expectations for Chinese consumption in H2 2018 as we look for

the lagged effect of credit tightness to rein in marginal demand

growth.


8

Base Metals Outlook

Revised supply-demand balance and price forecast summary

Source: MBR, ICSG, Company Reports, China NBS, CNIA, ICBC Standard

Balance revisions – balanced 2018, smaller deficits 2019-20


4,000

5,000

6,000

7,000

8,000

9,000

(400)

(200)

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400

600

2010 2012 2014 2016 2018 2020

US

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Balance Price

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400

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2015 2016 2017 2018 2019 2020

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May forecast February forecast


Mine supply steady, if not spectacular

● Our database of copper mines, which we closely monitor for

quarterly output and guidance changes, covers c.75% of global

mine supply. Before the Q1 2018 reporting season, we were

looking for a 14% y/y increase in output from this group in the first

quarter of the year, and an annual increase of 6.2% in 2018.

● With most Q1 results now in, supply has undershot a little. Growth

last quarter was closer to 12% y/y and annual growth now looks

more like 4.5% after notable guidance downgrades by Freeport and

Southern Copper.

● Of course, the very strong Q1 reflects higher output from Escondida

and Grasberg (both severely disrupted last year), as well as

Katanga (coming back from suspension).

● There remains some focus on the swathe of labour contracts up for

renewal across the Americas, particularly those in Chile. Some

322kt of production was lost to strikes last year, most of which was

accounted for by the aforementioned 44 day walkout at Escondida.

● Strike-related losses this year are currently zero, at least for the

mines we cover. Of the 4.2Mt of concentrate production with

labour contracts up for renewal this year in the Americas alone,

600kt were already off the ‘at-risk’ list by the time of our last Base

Metals Outlook in February.

● Since then, a further 1Mt has dropped off the “at risk” list, after

deals were signed without any negative impact on production (see

next slide). In theory, that leaves some 2.6Mt of concentrate

production at risk.

● As for refined production at risk of strike-related outages, that

count has halved from 1.5Mt at the start of the year to 741kt now.

●

9


Mine supply disruptions, all causes

Source: MBR, ICSG, ICBC Standard

●

Production from top 10 copper mines

Source: MBR, Company Reports, ICBC Standard

800

900

1000

1100

1200

1300

1400

1500

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

Q1 2012 Q1 2013 Q1 2014 Q1 2015 Q1 2016 Q1 2017 Q1 2018

00

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y/y % Production

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2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

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Disruption tracker: Labour contract negotiations, Americas 2018

●

10


●

Production at risk

Company Operation Union Deal status Total Concs Refined

January Chile Glencore Lomas Bayas Labor Union Agreement reached 80 80

Canada Hudbay Manitoba Labor Union Agreement reached 41 41

Peru Hudbay Constancia Labor Union Agreement reached 133 133

Chile Codelco Andina Labor Union Agreement reached 193 193

Chile Codelco Chuquicamata Supervisors Union Agreement reached 302 302

Chile Codelco Radomiro Tomic Labor Union Agreement reached 318 318

Chile Codelco Ventanas Labor Union Agreement reached 407

February Chile Antofagasta Los Pelambres Labor Union Agreement reached 368 368

March Chile Lumina Caserones Plant union Agreement reached 117 117

Chile Codelco Ministro Hales Supervisors Union Agreement reached 237 237

Chile Codelco Ventanas Labor Union Agreement reached

April Chile Antofagasta Centinela Labor Union Sulfuro Mina Agreement reached 180 180

May Chile Codelco Casa Matriz Labor Union Agreement reached

June Chile Codelco Andina Labor Union Agreement reached

Chile Antofagasta Centinela Labor Union Sulfuro Planta Agreement reached

Chile Antofagasta Los Pelambres Plant union Agreement reached

Chile BHP Spence Staff 167 167

Chile BHP Escondida Labor Union Started April, no deal 1002 667 312

July Chile Lumina Caserones Mine Union Agreement reached

Peru Antamina Antamina Labor Union 444 444

Chile Codelco Andina Supervisors Union

Chile Codelco Salvador Labor Union 60 60

August Peru Freeport Cerro Verde Labor Union 522 442 61

Chile BHP Cerro Colorado Labor Union 74 74

September Chile Codelco El Teniente Labor Union 475 475

Chile Codelco Salvador Labor Union

Chile Codelco Gaby Supervisors Union 122 122

October Chile Antofagasta Centinela Labor Union Oxido Planta Agreement reached

Chile Antofagasta Centinela Labor Union Oxido Mina Agreement reached 56 56

Chile Collahuasi Collahuasi Supervisors Union 507 502 5

Chile Codelco El Teniente Supervisors Union

Chile Codelco Ministro Hales Labor Union

Chile Codelco Vice presidency of projects Supervisors Union

November Chile BHP Spence Labor Union

December Chile Lumina Caserones Supervisors Union

Total production at risk as of January 1 5398 4241 1522

Production still at risk as of May 25 3373 2590 741

Source: MB, MBR, ICBC Standard


Mine supply disruption tracker - under par ytd

●

●

●

●

11



● Aside from strikes, copper’s vulnerability to disruptions from other

sources are well known – equipment breakdowns, ground instability,

earthquakes, weather, low grades, government action etc.

● On a 5-year average basis, copper mines lose around 1.4mtpy of

production from a range of unplanned outages. On a 10-year basis,

the average loss is 1.2mtpy – equivalent to a rate of about 6% of

global production.

● Given the lumpy fashion in which these events can occur, we still feel

it prudent to allow for a ‘normal’ 6% disruption figure.

● So far this year, however, we have only identified 533kt of lost mine

production due to unplanned disruptions.

● If H2 proceeds as smoothly as H1, the market should drift into a small

surplus:

− Disruptions from strikes (165ktpy on a 10-year average basis)

stand out as running well below par this year (zero, as discussed

above).

− Technical-related disruptions and breakdowns, including ramp-up

problems that still plague Caserones and Sierra Gorda, for

example, are running at 194kt this year, compared with the 10-

year average of 427kt.

− Our “other” category includes disruptions from weather or other

natural causes, accidents and power shortages, for example. We

have 16kt noted here in 2018, versus a 10-year average of 222kt.

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

2003 2005 2007 2009 2011 2013 2015 2017

Disruption rate 10-year average 5-year average

●

●

Annual copper mine disruption rate (excl. market-related cuts)


Mine disruptions by major cause

0 100 200 300 400 500

Grades

Technical

Labour/social

Government

Market

Other

2018 ytd 10-year average


2018 goes from small deficit to balanced but deficits widening thereafter

● In light of China’s capacity additions and with such a smooth H1 for

concentrate supply, we have increased our Chinese refined

production forecast for 2018.

● We now expect refined production growth of 5% this year, up from

our previous forecast of 4%. Production expanded 4.5% y/y in Jan-

Apr and concentrate imports rose 9.8% y/y.

● This is despite expectations for a slip in secondary output, on

account of more stringent scrap import rules and a 38% y/y drop in

Q1 imports.

● Regarding demand, end-use indicators have been sending

distinctly mixed messages. Aside from the bifurcation between real

estate (+7.7% y/y) and power grid investment (-23.2% y/y) in Q1,

white goods’ sales figures have diverged from one another.

● Netting these disparities out and recognising the non-bank lending

driven slowdown in credit growth – augmented total social

financing was down 16% y/y through April, resulting in M1 growth

slowing to 10.2% y/y in Q1, from 18.2% y/y a year ago – we expect

slower but still steady Chinese demand growth. Specifically, we

forecast a 2.6% increase for China’s 2018 consumption, that

compares to 5.9% in 2017.

● Marginally higher Chinese production and lower consumption has

therefore removed the 100kt deficit we initially forecast for 2018.

We now expect a globally balanced refined market this year.

● Nonetheless, deficits should return from 2019 and are expected to

deepen thereafter.


12

Base Metals Outlook

Divergent Chinese demand indicators in Q1

Source: MBR, China NBS, ICBC Standard

Chinese refined production – up 4.5% y/y in Jan-Apr

Source: MBR, China NBS, ICBC Standard

-28% -24% -20% -16% -12% -8% -4% 0% 4% 8% 12% 16%

Power Grid

Freezers

Refrigerators

Auto Sales

AC Motors

Real Estate FAI

Air con

300

400

500

600

700

800

900

Apr 10 Apr 11 Apr 12 Apr 13 Apr 14 Apr 15 Apr 16 Apr 17 Apr 18

00

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Forecast summary

● We have nudged down our 2018 annual price forecast from

$7,275/tonne to $6,887/tonne, given the sideways Q2 price

action, pick-up in threats to global economic growth and

consequent disappearance of the 100kt deficit we previously

forecast. A supply side story is probably required to justify any

move towards $8,000/tonne before our base case assumption

that this target will not be reached – sustainably at least – until

2020.

● Spot TC/RCs have been edging higher lately, reaching $70/7c in

May on ample concentrate availability and smelter outages. But

new Chinese smelter capacity ramps up should put TC/RCs back

under pressure in H2, especially if mine supply disruptions pick up.

● Premiums haven not done much, but they have been working

higher in the US (amid rising fuel costs), and in China (on import

losses, seasonal pick-up in demand and scrap shortages). Further

forward, the thing of note is that the majority of COMEX stock has

built in out-of-the-way Salt Lake City. When markets tighten, it could

prove costly to move this to areas of genuine consumption.

● It should also be noted that the front-end of the LME curve has

recently flipped into backwardation. This could indicate a sudden

tightening of the physical market but we think it more likely to

reflects the rolling of short spread positions and some covering of

outright shorts. As 2015 demonstrates, a backwardated curve is

perfectly possible without a tight underlying market and there is no

shortage of exchange stock – combined LME, SHFE and Comex

inventories currently stand around decade highs above 800kt.

● These tight spreads and short covering flows have provided the

catalyst for a quick move higher and, with investor positioning

relatively light, there is scope for new length – both discretionary

and systematic – to deliver a strong H1 finish before H2 gives way

to a softer period. Nevertheless, we still expect dips to be

supported and, ultimately, prices to remain on a rising trajectory

over our forecast period.

●

13


Backwardation due to LME positioning or genuine tightness?

Source: LME, Bloomberg, ICBC Standard Bank

●

TCs expected to maintain their downward trend

Source: MB, MBR, ICBC Standard Bank

-50-40-30-20-10

0102030405060708090

100

Jan-14 Jan-15 Jan-16 Jan-17 Jan-18

LME Cu1 --- LME Cu3

Backwardation

Contango

$60

$70

$80

$90

$100

$110

$120

May 15 Nov 15 May 16 Nov 16 May 17 Nov 17 May 18

Spot Annual contract CSPT floor


Balanced market in 2018, then deficits return

14


Source: MBR, ICSG, Company Reports, China NBS, CNIA, Bloomberg, ICBC Standard

Annual Global Supply/Demand Balance for Copper, 2010-2020

Thousands of tonnes 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

M ine pro duct io n

T o tal 16,051 16,056 16,690 18,185 18,432 19,148 20,357 19,991 20,670 21,228 21,717

Year-on-year % change 0.6% 0.0% 3.9% 9.0% 1.4% 3.9% 6.3% (1.8%) 3.4% 2.7% 2.3%

R efined pro duct io n

Africa 870 960 1,057 1,275 1,356 1,382 1,234 1,209 1,336 1,389 1,431

North America 1,664 1,725 1,655 1,717 1,819 1,905 1,989 1,868 1,858 1,869 1,884

Latin America 3,877 3,698 3,419 3,404 3,343 3,312 3,200 3,008 3,068 3,065 3,080

Asia (ex. China) 3,943 3,780 3,910 3,838 4,008 4,035 4,241 4,288 4,352 4,400 4,448

China 4,540 5,163 5,879 6,667 7,649 7,969 8,436 9,041 9,493 9,920 10,317

Australasia 424 477 460 481 509 474 479 431 469 481 491

Europe 3,649 3,797 3,820 3,677 3,794 3,793 3,726 3,815 3,854 3,892 3,912

T o tal 18,967 19,600 20,200 21,059 22,478 22,870 23,304 23,659 24,430 25,017 25,563

Year-on-year % change 3.9% 3.3% 3.1% 4.3% 6.7% 1.7% 1.9% 1.5% 3.3% 2.4% 2.2%

R efined co nsumptio n

North America 2,176 2,203 2,223 2,317 2,259 2,317 2,337 2,363 2,399 2,437 2,481

Latin America 656 600 615 612 579 497 463 458 472 496 511

Asia (ex. China) 4,235 4,135 4,171 4,330 4,500 4,541 4,658 4,774 4,865 4,972 5,097

China 7,393 7,885 8,205 9,400 10,450 10,690 11,214 11,876 12,185 12,550 12,964

Europe 4,225 4,495 4,201 4,150 4,288 4,062 4,102 4,192 4,272 4,345 4,410

Others 416 402 373 333 270 269 225 227 234 241 248

T o tal 19,101 19,720 19,788 21,142 22,346 22,376 22,999 23,891 24,426 25,041 25,710


Implied surplus (def ic it ) (134) (120) 412 (83) 132 494 305 (232) 4 (24) (147)

Sto cks analysis

LM E 378 372 321 366 172 236 328 202

COM EX 59 80 64 15 26 70 83 211

SHFE 132 93 205 126 106 183 147 150

Chile 184 204 279 353 503 494 385 379

Other producer 296 295 334 284 317 299 294 300

M erchant 21 21 22 14 17 19 18 10

Consumer 109 120 116 111 118 120 121 120

Chinese bonded 375 325 775 550 590 375 465 470

T o tal 1,554 1,510 2,116 1,819 1,849 1,796 1,841 1,842 1,846 1,822 1,675

Stocks as weeks of consumption 4.2 4.0 5.6 4.5 4.3 4.2 4.2 4.0 3.9 3.8 3.4

3

Aluminium: Trade

tensions take centre

stage


Attention shifts from China to the Rest of the World

Trade tensions heighten market uncertainty

● 2017 was dominated by developments in China, with controls on

illegal smelting capacity and winter pollution curtailments taking

centre stage. Although the net output reduction proved minimal,

the important medium-term impact was the rapid prior pace of

capacity additions finally being brought under control.

● In early 2018, by contrast, US policy changes have stolen the

limelight. Indeed, the aluminium market has struggled to digest a

host of actual and potential disruptions.

● The introduction of AD/CV duties payable on imports of common

alloy sheet and foil from China could effect around 1Mt/y of trade.

● With the market already reeling from the announcement of Section

232 10% import tariffs (on national security grounds), in early April

Section 301 tariffs (response to coerced technology transfer)

specifically aimed at Chinese products were announced. And days

later came the news of sanctions on Rusal.

● The initial uncertainty catalysed a jump in Mid-West premiums

back towards 2015 highs, before the sanctions announcement

triggered a near 30% flat price rally and flipped the forward curve

into backwardation.

● At time of writing, the outcome for Rusal’s production remains

unclear. Nevertheless, after OFAC’s issuance of General Licence

(GL) 14 and extension of the wind down period for Rusal related

transactions to October 23rd, our base case assumption is that the

company’s refineries and smelters will continue to operate. Were

further policy announcements to change this, as discussed in our

April 12th report1, we still think the direct impact would be much

larger on alumina and, particularly, the value added products

sector than on primary aluminium.

● In the meantime, Russia and other major suppliers of metal are

still subject to the Section 232 announcement. Specifically, based

on 2017 data, 93% of the primary metal imported by the US would

have been captured in the 10% tariff.

● To date, no major supplier of prime metal into the US has received

exemption from the tax. Brazil, Argentina and Australia have

already secured permanent exemptions, but with quotas attached.

While Canada and the EU saw their temporary exemptions expire

on June 1st.

● This should keep premiums elevated but also raises the question

of whether additional US smelter restarts will be forthcoming. Over

700kt of capacity is currently idle and without a plan to restart.

This would go someway to off-setting disruptions to imports but

current alumina prices are raising the all-in level at which these

operations would manage to turn a profit.

●

16


Major US suppliers will be subject to tariffs

Source: Customs data, MBR, ICBC Standard

1: https://www.icbcstandardbank.com/CorporateSite/ResearchStrategy/Reports

0.0

0.5

1.0

1.5

2.0

2.5

3.0

M t

on

ne

s

Exempt from

Section 232 tax Non-exempt

US imports of primary

metal in 2017 = 4.96m


Alumina availability causes a scare

●

●

17


Alumina input costs soar to unprecedented levels

Source: MBR, ICBC Standard

China traditionally an alumina importer

Source: MBR, Antaike, China Customs, ICBC Standard

● Aluminium is one of very few commodities where raw material

availability is generally taken as a given. But recent supply shocks

have sent the price of alumina soaring.

● The run up in prices was triggered by the early March

announcement that the local Brazilian government had, on

environmental grounds, ordered a 50% output reduction at the

6.6Mt/yr Alunorte refinery. Momentum was added following the

Rusal sanctions announcement, which brought into question the

ongoing availability of supplies from their 2 Mt/yr Irish and

0.65Mt/yr Jamaican operations.

● In late April alumina pricing hit $700/t, which, assuming a

conversion rate of 1.92 per tonne of Al, implied input costs

equating to c.60% of the aluminium price, versus a usual c.30-40%

range.

● Prices did correct after the publication of GL 14 and Rio Tinto’s

announcement that they would resume alumina shipments from

Rusal’s Aughinish refinery but, at near 500$/t, they remain

elevated.

● And not only could the Rusal situation remain unresolved come

October but there is also little clarity on when or if Alunorte will be

able to ramp back up.

● One potential source of alternative supply, would be for China to

turn net alumina exporter. Given domestic capacity of c.81Mt/y

and forecast demand of c.74Mt, if price differentials incentivise

exports, refiners have the potential to fill an ex-China shortfall.

● But domestic stocks are currently low and Chinese refineries’

recent c.66Mt/y aggregate run rate would need to be lifted

substantially – potentially running into environmental permitting

constraints.

0%

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1,500

Jan

16

Ma

r 1

6

Ma

y 1

6

Jul 1

6

Se

p 1

6

No

v 1

6

Jan

17

Ma

r 1

7

Ma

y 1

7

Jul 1

7

Se

p 1

7

No

v 1

7

Jan

18

Ma

r 1

8

Ma

y 1

8

Alu

min

a in

pu

t co

st

as %

of

LM

E

pri

ce

Alu

min

a in

pu

t co

st

for

1t

of

Al -

$/to

nn

e

Cost of alumina to produce 1t Al (LHS)

Alumina input cost as % of LME (RHS)

-200

-100

0

100

200

300

400

500

600

700

Jan

15

Ma

y 1

5

Se

p 1

5

Jan

16

Ma

y 1

6

Se

p 1

6

Jan

17

Ma

y 1

7

Se

p 1

7

Jan

18

‘00

0 t

on

ne

s

Exports Imports


Chinese output still an issue

●

●

18

Base Metals Outlook


Monthly Chinese Al output on an annualised basis

Source: China NBS, Antaike, SMM, MBR, ICBC Standard

Chinese domestic supply demand balance

Source: MBR, Antaike, China NBS, ICBC Standard

● Attention may have been focussed on the aforementioned US

trade policies and rapid run up in alumina pricing over the past

couple of months but the issue of Chinese oversupply remains.

● Chinese aluminium production has flattened off in recent months

but it has not declined, despite government efforts to rein in output

from illegal operations and polluting facilities. Even soft SHFE

pricing and rising SHFE stocks have failed to dent operating levels

to any notable degree, with reductions being offset by the ongoing

start up of new capacity.

● The scale of net smelter capacity additions in 2018 (2.2Mt) should

be lower than that of recent years (4Mt in 2017) but we still expect

to see China’s aluminium output hit 37.7Mt this year. Against this,

demand is forecast to expand by 5.5% to 36.4Mt, leaving an

implied primary metal surplus of 1.25Mt.

● With the country’s 15% export duty keeping the vast majority of this

metal at home, exports will continue to take the form of semi-

manufactured products. And, at SHFE-LME price spreads around

$300/mt, we would not be surprised to see these volumes hold

above 450kt/month.

● Clearly, this implies a greater than 1.25Mt total surplus, with

fabricator consumption of primary metal for export as semis

inflating apparent above real domestic demand.

● A major risk to these China forecasts is therefore reduced demand

from semi-fabricators targeting sales into the US. Were such a

scenario to eventuate, it would exacerbate both the Chinese

surplus and World ex-China deficit.

25

27

29

31

33

35

37

39

Jun-17 Aug-17 Oct-17 Dec-17 Feb-18

mtp

y

NBS estimates Antaike estimates SMM estimaes

0

500

1,000

1,500

2,000

2,500

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

China Primary Balance


Beyond China, market tightening continues

●

●

19

Base Metals Outlook


Ex-China aluminium supply-demand balance

Source: China NBS, Antaike, MBR, Company Reports, Bloomberg, ICBC Standard

LME prices outperforming SHFE

Source: LME, SHFE, Bloomberg, ICBC Standard

● High alumina prices have also contributed to a pre-existing

unwillingness of companies with idled smelting capacity to commit

to significant production restarts. As a result, the ex-China

aluminium market should remain in significant deficit over the

2018-2020 period.

● The scale of announced US restarts (under 0.5Mt/y) has only

skimmed the top off these anticipated deficits. And if Rusal’s

aluminium output is disrupted as a result of sanctions, then this

deficit would deepen.

● Elsewhere, we have made only modest revisions to our supply

forecasts for the 2018-2020 period, with higher US numbers offset

by losses in Brazil – where lower alumina supply has forced Hydro

to reduce operating rates at its Albras smelter.

● Our forecasts for Chinese output remain unchanged, as do our

forecasts for output from Rusal’s smelters. However, both of these

numbers could potentially see important revisions over the coming

months as a direct result of the ongoing US trade developments.

● Similarly, on the demand side of the equation our revisions have

been modest. Although we consider the trade tensions between

the US and China to be a threat to the stability of aluminium

demand in both countries. We have revised down our Chinese

demand estimates from 6.1% to 5.5% in 2018, although for now

this reflects marginally softer domestic consumption rather than

export demand. Our demand forecast for the Rest of the World is

unchanged at 3.3% in 2018, and 3.0-3.1% over 2019-20.

● Netting all this out, the market deficit for 2018 is little changed

from our prior forecast at 544kt (533kt previously).

● In light of this, cost push pressures from alumina prices and the

necessary increase in risk premium from policy uncertainty, we

forecast a 2018 average LME 3m price of $2,228/t.

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2010 2012 2014 2016 2018 2020

$/to

nn

e

M t

on

ne

s

RoW Balance (LHS) Annual price

-600

-500

-400

-300

-200

-100

0

100

200

300

400

Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18

Relative SHFE-LME 3M Price 10dma

LME

Expensive

LME

Cheap


Premiums soar on potential supply disruption

●

●

●

●

20

Base Metals Outlook


LME and SHFE inventories moving in opposite directions

Source: LME, SHFE, ICBC Standard, Bloomberg

… as LME stocks buffeted by cancellations and re-warranting

Source: LME, ICBC Standard, Bloomberg

Premiums higher across the board, with U.S. leading the way

Source: MBR, ICBC Standard

Spread volatility picking up, as curve shifts into backwardation

Source: LME, Bloomberg, ICBC Standard

-200

-150

-100

-50

0

50

100

150

200

250

Jan 14 Jul 14 Jan 15 Jul 15 Jan 16 Jul 16 Jan 17 Jul 17 Jan 18$

/to

nn

e

Aluminium - 3M -15M spread

0

90

180

270

360

450

540

Jan 15May 15Sep 15 Jan 16May 16Sep 16 Jan 17May 17Sep 17 Jan 18May 18

$/to

nn

e

EU DP Midwest Japan

0

200

400

600

800

1,000

1,200

0

1,000

2,000

3,000

4,000

5,000

6,000

2014 2015 2016 2017 2018

LME (kt) SHFE (kt, rhs)

0

500

1,000

1,500

2,000

Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18

LME Aluminium On Warrant (kt) LME Aluminium Cancelled Warrants (kt)


Market moving back to deficit

●

21

Base Metals Outlook


Source: MBR, IAI, ICBC Standard Bank

Annual Global Supply/Demand Balance for Aluminium, 2010-2020


Production

Africa 1,742 1,808 1,620 1,776 1,748 1,674 1,661 1,674 1,674 1,729 1,729

North America 4,691 4,971 4,851 4,918 4,571 4,475 3,966 3,961 4,127 4,193 4,246

Latin America 2,305 2,184 2,088 1,912 1,543 1,323 1,368 1,347 1,236 1,324 1,236

Asia (ex. China) 2,691 2,836 3,002 2,800 3,315 3,734 4,495 5,105 5,585 5,870 6,313

Western Europe 3,800 4,027 3,599 3,435 3,382 3,521 3,729 3,754 3,828 3,828 4,016

Eastern/Central Europe 4,532 4,744 4,719 4,592 4,278 4,213 4,356 4,395 4,441 4,441 4,591

Australasia 2,277 2,306 2,186 2,106 1,995 1,984 1,981 1,854 1,914 1,914 1,914

China 17,332 19,647 22,879 25,892 28,469 31,686 32,784 36,371 37,663 39,230 40,830

Middle East 2,796 3,374 3,759 3,936 4,835 5,222 5,229 5,173 5,289 5,665 5,780

Total 42,165 45,896 48,704 51,367 54,136 57,832 59,569 63,635 65,758 68,194 70,656


Consumption

North America 4,628 4,803 5,363 5,388 5,747 5,922 6,175 6,354 6,533 6,723 6,857

Latin America 1,812 1,983 1,996 2,038 1,963 1,758 1,679 1,718 1,779 1,862 1,911

Asia (ex. China) 8,317 8,915 9,093 6,941 7,279 7,572 7,934 8,317 8,694 9,022 9,483

Western Europe 6,602 6,737 6,514 6,403 6,742 6,656 6,930 7,094 7,249 7,356 7,442

China 16,414 19,041 21,453 24,234 26,872 29,334 31,993 34,520 36,419 38,121 39,582

Others 2,767 2,848 2,775 4,772 5,023 5,183 5,327 5,447 5,628 5,810 6,023

Total 40,539 44,326 47,194 49,777 53,626 56,426 60,037 63,450 66,302 68,893 71,298


Implied surplus (deficit) 1,626 1,570 1,510 1,590 510 1,406 (467) 185 (544) (699) (642)

Stocks analysis

LME 4,275 4,979 5,210 5,458 4,210 2,896 2,184 1,101

SHFE 441 208 442 182 210 297 101 754

Japan 224 247 284 263 413 394 276 242

Estimated Industrial Stocks 1,796 2,872 3,880 5,503 7,083 9,735 10,294 10,943

Total stocks 6,736 8,306 9,816 11,406 11,916 13,322 12,855 13,040 12,496 11,797 11,155


4

Nickel: Prices up despite

deficits down


Prices up despite deficits down

● As in February, Nickel remains our top pick amongst the base

metals and, with prices already up 20% year-to-date, it has

comfortably been the sector’s top performer.

● But this rally has run both further and faster than we expected it to.

Moreover, despite revisions to our supply-demand assumptions

showing a slightly larger than previously estimated 2017 deficit,

for 2018 we have reduced our global refined market deficit from

99kt to 46kt.

● Given current SHFE positioning, that makes us a little cautious

about the near-term scope for a price correction. Nevertheless, we

retain our medium-term optimism, expecting persistent deficits

across the forecast period.

● The supply side provides the main changes to our balance, where

we have raised our Chinese NPI production forecasts to better

reflect the faster than expected pace at which increased

Indonesian ore imports have been processed.

● We have also raised our forecasts for demand in Asia ex-China, not

just for 2018 but for 2019-20 too, as we start to get a clearer

picture of the ramp-up at Tsingshan’s integrated NPI-stainless steel

complex in Indonesia.

● Netting these revisions out, we now have a slightly smaller annual

deficit each year out to 2020 – a cumulative 207kt rather than

326kt previously.

● That takes global reported stocks down to 6.5 weeks of usage by

2020. Considering they stood at 16.5 weeks at the end of 2015,

that is a positive shift in the fundamentals but it does not suggest

that the market faces any imminent shortages.

● We still therefore expect prices to work higher over our forecast

period but they need not hurry. 23


●

●

Current supply-demand balance and price forecast summary

Source: MBR, INSG, Company Reports, ICBC Standard

●

Nickel supply-demand balance revisions


$8,000

$12,000

$16,000

$20,000

$24,000

(150)

(100)

(50)

0

50

100

150

200

2010 2012 2014 2016 2018 2020

00

0 t

on

ne

s

Balance Price

-150

-100

-50

0

50

100

150

2015 2016 2017 2018 2019 2020

00

0 t

on

ne

s

May forecast February forecast


The bull case still holds

Electric vehicles

● The first place to start for nickel’s bullish factors is clearly EVs. On

which count, LME Week Asia in Hong Kong seems to have

produced a wave of EV excitement just like LME Week in London

did last October.

● And increasingly it’s not all speculative – downstream consumers

in the auto and battery supply chains are starting to lock in future

tonnages at these still relatively low prices.

Exchange stocks

● Nickel exchange stocks continue their decline, with LME stocks

down 87kt this year and SHFE stocks down 13kt.

Q1 supply-demand estimates

● Nickel’s May rally coincided with the publications of the INSG’s

preliminary Q1 supply-demand estimates. These helped to validate

the reported stock decline with a very bullish estimate for a Q1

deficit of 39.1kt. This is higher than a year ago (27kt) and includes

the two largest monthly deficits on record this decade.

● The sizable Q1 2018 deficit was achieved by global demand growth

of 8.7% outstripping a 6.7% increase in total refined production.

● Within which, Indonesia stood out on both sides of the equation.

Production was up 21.4% y/y in Q1, reflecting the ongoing ramp-up

of NPI capacity, while nickel consumption in the country went from

zero in Q1 2017 to 40kt this year, of course as a result of

Tsingshan’s integrated NPI-stainless steel complex ramping up.

24


●

●

Monthly global nickel supply-demand balance estimates

Source: MBR, INSG, ICBC Standard Bank

●

Global reported Ni stocks – well off early-2016 cycle highs

Source: LME, SHFE, Bloomberg, MBR, ICBC Standard Bank

0

100

200

300

400

500

600

700

Nov 14 May 15 Nov 15 May 16 Nov 16 May 17 Nov 17 May 18

00

0 t

on

ne

s

China (SHFE + bonded) LME

-25

-20

-15

-10

-5

0

5

10

15

20

25

Sep 14 Mar 15 Sep 15 Mar 16 Sep 16 Mar 17 Sep 17 Mar 180

00

to

nn

es


Yet there are reasons for near-term caution

● The lead time of 8-10 years for commercialising a new technology

and the sunk costs of vehicle development mean investments

being made now almost ensure NCM/NCA battery technology will

be a key market segment in 2025. However, nickel prices, as they

are now, will be heavily influenced by the developing demand

outlook and it is far from certain that NCM/NCA will remain the

dominant long-term battery chemistry.

● Were a commercially viable alternative battery technology to

emerge in the next few years, such as sodium-ion or lithium-sulfur,

it would take the wind out of nickel’s sails.

● Although visible stocks have fallen significantly, nickel still has by

far the highest reported stocks to consumption level of all the base

metals.

● Furthermore, the stock overhang is composed of the (Class 1)

grade required by the battery industry. In other words, there is

plenty of appropriate metal for a market that barely accounts for

5% of total Ni demand.

● This inventory cover provides the industry with time to address

potential future supply tightness. And some producers, such as

BHP at Nickel West, are already starting to invest.

● At the same time, demand for Class 1 nickel from the stainless

sector should fade as NPI production growth outstrips stainless

steel production. Indeed, the industry continues its shift to low-cost

integrated NPI-stainless complexes in China and Indonesia, likely

at the expense of higher-cost non-integrated mills.

● In the shorter term, nickel positioning on SHFE is also becoming

stretched, with aggregate open interest already around 90% of its

previous peak.

25


●

●

LME inventory by type (kt)


0

50

100

150

200

250

300

350

2011 2012 2013 2014 2015 2016 2017 2018

Bagged Briquettes Full Plate Cathode Other

SHFE Nickel open interest approaching previous highs

Source: SHFE, Bloomberg, ICBC Standard

200

300

400

500

600

700

800

900

50,000

60,000

70,000

80,000

90,000

100,000

110,000

120,000

Jul-15 Jul-16 Jul-17 Jul-18

XII1 Comdty Aggregate SHFE Ni OI (thousand lots, rhs)


Rising Indonesian ore supply boosting Chinese NPI production…

●

●

●

●

26


China’s ore imports – Indonesia returns

Source: China Customs, MBR, Bloomberg, ICBC Standard

China’s total ore imports – up 117% y/y in Q1 2018


Chinese NPI production – up 22.9% y/y in Jan-Apr 2018

Source: Antaike, MBR, ICBC Standard

Chinese ore stocks – bottoming out

Source: Antaike, SMM, Bloomberg, MBR, ICBC Standard

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

Mar 13 Mar 14 Mar 15 Mar 16 Mar 17 Mar 18

millio

n t

on

ne

s

Philippines Indonesia

0

1,000

2,000

3,000

4,000

5,000

6,000

J F M A M J J A S O N D

00

0 t

on

ne

s

2018 2017 2016 2015

15

20

25

30

35

40

45

50

Apr 15 Oct 15 Apr 16 Oct 16 Apr 17 Oct 17 Apr 18

00

0 t

on

ne

s

0

05

10

15

20

25

May 14 May 15 May 16 May 17 May 18m

illio

n t

on

ne

s


Outlook summary

● As noted earlier, revisions to our supply-demand balance have

shrunk the global refined market deficits we forecast for 2018-

2020.

− For 2018, the deficit has gone from 99kt to 46kt.

− For 2018-2020, the cumulative deficit has become 207kt

rather than 326kt previously.

● These revised nickel deficits are still the largest, as a percentage of

consumption, for any base metal.

● But nickel also had the largest surpluses in the 2013-2015 period.

This has left nickel with by far the highest reported stock level of all

the base metals relative to consumption. That will still be the case

in 2020.

● So nickel’s fundamentals are moving in the right direction – and

relatively fast – but the scale of legacy inventory means the market

is far from short of material. Nickel should not get as tight as zinc is

currently (3 weeks of consumption), for example, until the early-

mid 2020s.

● Nevertheless, this is still an outlook that supports stronger prices

and we think it is right that nickel is edging higher overall.

● Given Q1’s lower level, prices are only likely to average in the

$14,000s this year before moving sustainably towards the

$16,000s over our forecast period.

● Against this backdrop, we expect dips to well supported by

consumers using the opportunity to lock-in levels, while bouts of

EV related speculative excess could easily drive periodic price

spikes.

27


●

●

But also the highest legacy stock level


●

Deficit/surplus as % of use – Ni has the largest forecast deficits


-6

-4

-2

0

2

4

6

2015 2016 2017 2018 2019 2020

% o

f co

nsu

mp

tio

n

Copper Aluminium Nickel Zinc Lead

0

4

8

12

16

2017 2018 2019 2020

we

ek

s o

f co

nsu

mp

tio

n

Nickel Aluminium Copper Zinc Lead


Still bullish, but 2018-20 deficits revised lower

●

28



Annual Global Supply/Demand Balance for Nickel, 2010-2020


Mine production

Total 1,637 2,199 2,358 2,595 2,164 2,152 2,006 2,191 2,322 2,392 2,471

Year-on-year % change 20.7% 34.3% 7.2% 10.1% (16.6%) (0.6%) (6.7%) 9.2% 6.0% 3.0% 3.3%

Refined production

Africa 36 37 41 59 75 89 84 79 82 84 85

North America 105 142 152 153 150 159 158 158 152 146 143

Latin America 118 126 154 133 144 144 145 151 158 163 166

Asia (ex. China) 205 196 209 229 244 297 376 462 564 609 633

China 332 435 519 694 691 600 573 624 660 700 725

Australasia 141 150 174 190 201 210 212 216 225 227 231

Europe 503 516 510 498 484 477 435 393 399 402 415

Total 1,442 1,602 1,760 1,955 1,988 1,976 1,984 2,082 2,238 2,330 2,398

Year-on-year % change 9.7% 11.1% 9.9% 11.1% 1.7% (0.6%) 0.4% 5.0% 7.5% 4.1% 2.9%

Refined consumption

North America 130 141 145 153 158 151 156 162 164 168 169

Latin America 23 24 21 22 21 21 24 22 23 23 24

Asia (ex. China) 354 347 340 335 353 362 381 466 522 569 592

China 575 704 770 899 957 980 1,090 1,159 1,193 1,246 1,321

Europe 356 364 364 351 360 342 344 346 351 354 356

Others 27 27 27 26 24 27 31 31 33 34 36

Total 1,465 1,607 1,668 1,785 1,873 1,882 2,026 2,185 2,284 2,395 2,498


Implied surplus (deficit) (23) (5) 92 170 115 95 (42) (104) (46) (63) (98)

Stocks analysis

LME 137 91 142 262 415 441 371 368

SHFE 0 0 0 0 0 49 94 44

Producer 90 96 87 88 92 85 85 88

Consumer and merchant 18 20 22 20 20 22 19 20

Total 245 206 250 369 527 597 569 520 474 411 313


5

Zinc: Still rebalancing


Still rebalancing

● Zinc’s underlying supply-demand fundamentals continue to evolve

largely in line with our expectations. Indeed, the core narrative for

our forecast period out to 2020 remains little changed.

● Stock and price action in zinc is starting to create the perception

that we are at the top of this bull market. But stock builds since Q4

2017, both in China and on the LME, have, in our view, been less

to do with the underlying fundamentals turning and more to do

with the relocation of inventory from off-market stockpiles to the

visible domain. We still think 2018 will be a deficit year overall.

● There were always going to be tighter periods and looser periods

during the drawn out rebalancing process. Q2 2018, for example,

should be tighter than Q1 given Chinese smelter maintenance and

a seasonal pick-up in demand. This could persist through Q3 but

Q4 looks incrementally less tight as rising concentrate supply

should support higher refined production.

● Q1 demand was relatively soft – with Chinese galvanised steel

production falling 3.9% y/y – and, as per the macro drivers

effecting our other base metal demand assumptions for H2, we

have also lowered our growth forecast for Chinese zinc demand

this year to 2.1%, from 2.5% previously.

● This gives us a global refined market deficit of 238kt in 2018 –

about half the size of last year’s 474kt deficit. Previously we

modelled a 292kt deficit in 2018.

● The 2019 deficit still looks incrementally smaller (142kt now vs

197kt previously) and 2020 should see the market return to

balance.

30


Stocks up, prices down

Source: LME, SHFE, MBR, ICBC Standard

● Global refined zinc market balance

Source: MBR, ILZSG, Company Reports, Customs Data, Bloomberg, ICBC Standard Bank

1,400

1,900

2,400

2,900

3,400

(600)

(400)

(200)

0

200

400

600

2010 2012 2014 2016 2018 2020

US

D /

to

nn

ne

00

0 t

on

ne

s

Balance Price

1000

1500

2000

2500

3000

3500

4000

0

200

400

600

800

1000

1200

May 14 May 15 May 16 May 17 May 18

US

D/to

nn

e

00

0 t

on

ne

s

China bonded SHFE LME Price [RHS]


Concentrate market taking its time to turn the corner

●

●

●

31


12m MA of global Zn mine production – recovery has stuttered

Source: ILZSG, MBR, ICBC Standard

Zinc concs TCs – approaching a floor


Implied zinc concentrate market balance


● The concentrate market still looks tight and, if there are any slips

to scheduled mine ramp-ups, could create a bullish surprise. Spot

TCs have barely recovered from their lows; ILZSG has downgraded

its estimates for 2017 global mine supply and, amid stricter

environmental controls and lower ore grades, Chinese output fell

6.7% y/y in Q1 this year, according to the NBS.

● But we think a recovery in spot TCs is close. Chinese smelters are

on maintenance this quarter, Dugald River has reached full

capacity already, Lady Loretta’s restart is progressing, Gamsberg is

close to start-up and Century’s tailings restart will follow.

● But, after such a period of tightness, the first pulse of a concs

supply recovery tends to restock the depleted supply chain and

displace smelters last-resort usage of off-grade material. This

creates a lag between the recovery in concs and refined supply.

-800

-600

-400

-200

0

200

400

2010 2012 2014 2016 2018 2020

00

0 t

on

ne

s

1000

1050

1100

1150

1200

Mar 14 Sep 14 Mar 15 Sep 15 Mar 16 Sep 16 Mar 17 Sep 17 Mar 18

-9%

-6%

-3%

0%

3%

6%

9%

y/y change Production

3000

3500

4000

4500

5000

5500

6000

$0

$50

$100

$150

$200

$250

Nov 14 May 15 Nov 15 May 16 Nov 16 May 17 Nov 17 May 18

Rm

b/to

nn

e

US

D/to

nn

e

Annual benchmark ($/t) Imported spot ($/t) Domestic spot (RMB/t) [RHS]


Prices likely past their peak

● Our prior view on zinc was that there remained the possibility of

one final hurrah and a new high for the LME 3m contract.

● Now, however, we have less conviction in that view. In light of off-

market stocks becoming more visible, marginal downgrades to

demand forecasts and the market’s year-to-date performance, we

have downgraded our price forecasts.

● That said, recent zinc price performance shares similarities with

that seen during the same period last year, when a major

corrective episode within the bull market turned out to be a

continuation pattern – the precursor to another rally to new highs.

● A repeat of 2017 is not our base case view but the risk cannot be

dismissed. Were there to be a supply set-back, significant

cancellation of exchange stock, or further tightening of spreads, it

would open up the possibility for a final push higher.

● Indeed, on a month-end basis, visible stocks (LME, SHFE, Chinese

bonded) jumped to 578kt in March from a cycle low of 371kt in

November. But since March, stocks have fallen on average by

around 35ktpm. At this rate – which, incidentally would only give us

a net annual deficit of 148kt, 90kt short of our forecast – we would

get back below last November’s stock nadir as soon as September.

● Nevertheless, fundamentals point to better risk-reward elsewhere

in the complex (nickel, copper), so we no longer expect zinc to

benefit from the strong financial flows which provided a tailwind to

its rally.

● Netting all this out, we expect prices to average $3,135/t for 2018

as a whole, before drifting to average $3,000/t in 2019.

32


Déjà vu for zinc prices this summer? We think not


● But Chinese zinc imports could yet bounce back

Source: China Customs, LME, SHFE, Bloomberg, ICBC Standard

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

Jul 14 Jul 15 Jun 16 Jun 17 May 18

US

D/to

nn

e

-50

0

50

100

150

200

250

0

20

40

60

80

100

120

140

Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18

China net Zn imports SHFE-LME Price Spread (3m lead, rhs)


Refined zinc market to rebalance by 2020

●

33



Annual Global Supply/Demand Balance for Zinc, 2010-2020


Mine production

Total 12,360 12,582 12,901 13,039 13,493 13,614 12,781 13,000 13,676 14,565 15,235

Year-on-year % change 6.5% 1.8% 2.5% 1.1% 3.5% 0.9% (6.1%) 1.7% 5.2% 6.5% 4.6%

Refined production

Africa 273 246 167 136 126 79 86 84 91 98 106

North America 1,261 1,232 1,234 1,212 1,147 1,182 1,138 1,067 1,163 1,186 1,204

Latin America 554 642 604 626 612 597 575 575 581 587 592

Asia (ex. China) 2,712 2,834 2,856 2,898 2,773 2,873 2,681 2,781 2,837 2,888 2,945

China 5,209 5,212 4,881 5,280 5,807 5,860 6,274 6,220 6,531 6,890 7,304

Australasia 499 515 501 498 488 489 470 462 471 472 472

Europe 2,355 2,398 2,385 2,354 2,445 2,477 2,395 2,408 2,434 2,447 2,459

Total 12,863 13,079 12,628 13,004 13,398 13,557 13,619 13,597 14,108 14,568 15,082

Year-on-year % change 13.8% 1.7% (3.4%) 3.0% 3.0% 1.2% 0.5% (0.2%) 3.8% 3.3% 3.5%

Refined consumption

North America 1,184 1,221 1,255 1,297 1,346 1,299 1,205 1,231 1,256 1,268 1,281

Latin America 432 428 395 396 402 388 355 367 384 397 409

Asia (ex. China) 2,669 2,633 2,679 2,832 2,839 2,618 2,852 2,839 2,896 2,962 3,036

China 5,403 5,458 5,343 5,927 6,401 6,337 6,654 6,966 7,112 7,326 7,509

Europe 2,489 2,513 2,377 2,372 2,349 2,413 2,378 2,349 2,372 2,420 2,468

Others 368 378 367 350 345 320 304 319 327 336 347

Total 12,545 12,631 12,416 13,174 13,682 13,375 13,748 14,071 14,346 14,710 15,050

Year-on-year % change 15.8% 0.7% (1.7%) 6.1% 3.9% (2.2%) 2.8% 2.3% 2.0% 2.5% 2.3%

Implied surplus (deficit) 318 448 212 (170) (284) 182 (129) (474) (238) (142) 33

Stocks analysis

LME 701 821 1,221 931 691 463 428 182

SHFE 309 364 311 239 83 200 153 69

Producer 305 333 325 296 371 373 395 375

Consumer 122 128 132 147 154 163 133 136

Merchant 15 14 13 13 13 12 12 14

SRB 109 109 209 254 254 254 254 254

Total 1,561 1,769 2,211 1,880 1,566 1,465 1,375 1,030 792 650 682


6

Lead: Stocks still thin on

the ground


Stocks still thin on the ground

● The potential for a more bullish narrative on lead has, in our view,

been suppressed by the lack of data clarity, relatively limited

liquidity and bull run in sister metal zinc.

● As a result, lead’s best chance to shine was going to be (1) when

the very low level of visible stocks triggers episodes of significant

tightness in the spreads, or (2) when zinc comes off the boil and

investors close or even reverse ‘long-zinc, short-lead’ positions.

● Both seem to have happened in May. Large warrant cancellations

in Rotterdam and Vlissingen pushed available LME stocks down to

72kt late in the month, their lowest level since June 2013. And

SHFE stocks continued to fall to just 12kt, their lowest since

February 2016 and essentially nothing in the context of a 5Mt/y

domestic market.

● Coinciding with this, another round of Chinese environmental

inspections on secondary capacity raised concerns about supply

disruptions and zinc prices – as discussed in the prior section –

suffered a correction. This saw lead’s discount to zinc almost

halve, reaching a low close to $500/t, as outright lead prices

climbed back above $2,500/t.

● Despite the LME warrant cancellations, the major driver of this

price rally has been SHFE. Shanghai open interest has surged

higher since April, rising 77% to c.140k lots. This lifted SHFE prices

towards $200/t over LME, creating some scope for LME catch-up.

● That said, this is not the first such surge in SHFE positioning, with

similar moves having occurred twice in the past two years. On each

occasion, the jump was relatively short-lived before excessive

speculative positions were unwound just as fast as they had been

built. Any improvements in domestic supply or swing back to net

Chinese imports of refined metal should result in a similar turn of

events this time round.

●

35


SHFE has been the major driver of lead’s recent rally

Source: SHFE, Bloomberg, ICBC Standard

● Visible lead stocks thin on the ground


0

20

40

60

80

100

120

140

160

180

200

Jan-16 Jul-16 Jan-17 Jul-17 Jan-18

LME on Wrnt (kt) LME cxld Wrnt (kt) SHFE (kt)

0

20

40

60

80

100

120

140

160

10,000

12,000

14,000

16,000

18,000

20,000

22,000

24,000

Jan-15 Jan-16 Jan-17 Jan-18

PBL1 Comdty Aggregate SHFE Pb OI (rhs)


Forecast revisions

● We have made revisions to our 2017 base year data – the most

significant of which was to increase our estimates for mine and

refined supply.

● The knock-on effect of these revisions, together with a small cut in

our Chinese demand forecast, have shrunk the global deficit we

expect to see this year. Our forecast deficit for 2018 now stands at

31kt, versus 103kt previously.

● And we now anticipate small surpluses in 2019-20 instead of small

deficits, though essentially still a balanced market in this period.

● In contrast to our reduced deficit expectations, however, the ILZSG

estimated that the global market was in deficit to the tune of 37kt

in Q1 2018 alone. But we find that hard to reconcile with other

indicators.

● For March, the latest ILZSG data puts global refined lead ‘apparent’

consumption at 1.01Mt and, for Q1 as a whole, 2.99Mt – a 4.0%

y/y increase.

● Their assumptions for China are behind these high global numbers.

It estimates ‘apparent’ consumption in the country jumped 7.1%

y/y in Q1. But, when considering lead-acid battery (LAB) production

was flat y/y, we think China’s ‘real’ consumption of refined lead is

growing at a more modest pace than these numbers suggest.

● As a result, we are comfortable forecasting lower figures of 2.6%

y/y for China’s 2018 demand growth and a commensurate global

figure of 1.8% y/y.

● In sum, demand should continue to outstrip supply in 2018 but not

to a dramatic extent.

●

36


● SHFE lead trading at a significant premium to LME


● Global refined lead supply-demand balance

Source: MBR, ILZSG, Company Reports, Customs Data, ICBC Standard

$1,500

$1,750

$2,000

$2,250

$2,500

(200)

0

200

400

600

2010 2012 2014 2016 2018 2020

00

0 t

on

ne

s

Balance Price

-600

-500

-400

-300

-200

-100

0

100

200

300

400

Jan-14 Jan-15 Jan-16 Jan-17 Jan-18

Relative SHFE-LME 3M Price 10dma

LME Expensive

LME Cheap


TCs back in positive territory but yet to move meaningfully higher

●

●

●

●

37


Lead TCs back above zero


Global reported stocks in weeks of use

Source: ILZSG, LME, SHFE, MBR, Bloomberg, ICBC Standard

Chinese Pb concs imports – still subdued

Source: China Customs, Bloomberg, MBR, ICBC Standard

China’s refined Pb production – recycling driving recent growth

Source: ILZSG, MBR, ICBC Standard

0

2

4

6

8

2013 2014 2015 2016 2017 2018 2019 2020

we

ek

s o

f co

nsu

mp

tio

n

Zinc Lead

0

50

100

150

200

250

300

350

400

Jul 11 Mar 13 Nov 14 Jul 16 Mar 180

00

to

nn

es

Primary Secondary

-50

0

50

100

150

200

250

300


China Pb Ore & Conc. Imports China Pb Ore & Conc. Exports

Net

-25

0

25

50

75

100

125

150

175

May 16 Nov 16 May 17 Nov 17 May 18

$/to

nn

e

Pb (low-Ag) Zn


Risks to our outlook

● Policy and geopolitical risks have become an additional

complication for the lead market and there are several key areas

which now need to be watched closely:

− North Korea: Last year UN sanctions on North Korea cut off

c.10% of China’s concentrate imports. If relations thaw and

sanctions are loosened, this should see trade flows resume.

− Iran: Although the natural focus falls on crude oil, Iran is also a

refined lead exporter. With the US withdrawing from 2015’s

nuclear accord and the consequent re-imposition of sanctions

on Tehran, these flows are at risk of disruption.

● Away from trade, China’s domestic production remains difficult to

track and usual issues around secondary production have been

compounded in recent years by the periodic feature of

environmental inspections.

● In terms of the data difficulty, the National Bureau of Statistics

reported 2017 refined production growth of 9.7%. However, the

same agency’s monthly absolute output series tallies up to imply

cumulative 2017 output growth of 18.8%.

● This discrepancy largely comes down to backward revisions, which

are only applied to the change series but not the absolute monthly

output figures. Although similar issues can plague other

commodities, the scope of revisions to lead estimates appear

particularly significant, largely on account of the greater role played

by harder to track secondary production.

● Given the lack of clarity, we tread a middle path and keep our

Chinese production forecasts unchanged +4.1% y/y for 2018. It

goes without saying, however, that a small deviation either way

could impact prices in what is otherwise a near balanced market.

●

38


● North Korean lead concentrate exports to China


● Iranian exports of refined lead

Source: ILZSG, MBR, ICBC Standard Bank

0

20

40

60

80

100

120

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 20170

00

to

nn

es

0%

2%

4%

6%

8%

10%

12%

14%

16%

0

2

4

6

8

10

12

14

16

18


Pb Conc. Imports from North Korea (kt) % from North Korea


Marginal 2018 deficit, before small 2019-20 surpluses

●

39


Source: MBR, ILZSG, ICBC Standard Bank

Annual Global Supply/Demand Balance for Lead, 2010-2020


M ine pro duct io n

T o tal 4,161 4,631 4,920 5,265 4,946 4,780 4,782 4,871 5,017 5,188 5,354

Year-on-year % change 9.2% 11.3% 6.2% 7.0% (6.1%) (3.4%) 0.0% 1.9% 3.0% 3.4% 3.2%

R efined pro duct io n

Africa 116 120 100 99 126 113 121 124 126 129 132

North America 1,777 1,884 1,836 1,779 1,773 1,663 1,738 1,629 1,645 1,640 1,657

Latin America 268 319 383 546 383 336 333 349 359 370 381

Asia (ex. China) 1,463 1,663 1,715 1,735 1,941 1,955 2,212 2,280 2,326 2,377 2,436

China 4,158 4,604 4,591 4,935 4,704 4,700 4,800 5,027 5,233 5,463 5,720

Australasia 229 246 203 232 226 223 224 211 222 223 225

Europe 1,737 1,799 1,820 1,865 1,868 1,952 1,904 1,951 1,959 1,974 1,984

T o tal 9,748 10,635 10,648 11,191 11,021 10,942 11,332 11,571 11,870 12,177 12,535


R efined co nsumptio n

North America 1,642 1,551 1,795 1,989 1,908 1,776 1,854 1,879 1,879 1,898 1,945

Latin America 365 388 394 379 382 384 384 375 384 400 420

Asia (ex. China) 1,793 1,933 2,048 2,042 2,121 2,189 2,290 2,330 2,405 2,465 2,514

China 4,171 4,588 4,574 4,912 4,709 4,662 4,837 5,050 5,181 5,337 5,540

Europe 1,644 1,660 1,660 1,712 1,734 1,733 1,866 1,920 1,914 1,924 1,928

Others 125 119 125 130 144 137 113 135 138 140 143

T o tal 9,740 10,239 10,596 11,164 10,998 10,881 11,344 11,689 11,901 12,163 12,489


Implied surplus (def ic it ) 8 396 52 27 23 61 (12) (118) (31) 14 46

Sto cks analysis

LM E 209 353 319 214 222 192 195 142

Producer 127 129 137 179 187 154 165 147

Consumer and merchant 111 92 110 123 113 96 124 151

SHFE 0 31 75 90 64 13 29 42

T o tal 447 605 641 606 586 455 513 482 451 465 511



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