Monday, April 25, 2016

An Overview

Base Metals Quarterly Report

Prepared By:

KCTL Research

PRICE REVIEW: LME

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PRICE REVIEW- LME

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LME ALUMINUM 3MO ($) LME ZINC 3MO ($) LME LEAD 3MO ($)

GLOBAL PMIs

Global manufacturing sector, including

the metals, is showing modest

improvement or at least stabilizing.

The U.S. index from the Institute for

Supply Management rebounded to 51.8

in Q1, 2016, the first sign of growth in

seven months.

China's figure topped 50 for the first time

since July in Q1, 2016, signaling a

recovery.

The EU reading rebounded to 51.6 from

a one-year low. Japan's index slipped to

49.1, the lowest in three years.

CHINA PMIs

China's metals demand may be

stabilizing as manufacturing shows

sign of a recovery.

The March official manufacturing PMI

inched up to 50.2, its first time above

the growth threshold of 50 in eight

months.

The new orders index reached a 17-

month high of 50.2. Overcapacity

cuts, such as the recently announced

reduction of 100-150 million metric

tons in crude steel output, may be

key to resolving the metal industry's

slump.

US FACTORY DATA SHOWS CONTRACTION

Despite a marked improvement in manufacturing

sentiment, the headline industrial production index

slumped significantly in Q1, as output dropped in

March and both January, February levels were

revised lower.

Headline industrial production declined -0.6%

during March, significantly below the -0.1%

estimate.

Manufacturing production declined -0.3% following

a smaller -0.1% decline in the previous month. The

details indicated weakness was concentrated in

motor vehicles where the output fell by -1.6%.

The capacity utilization rate declined further due to

the slump in industrial output. The overall utilization

rate fell to 74.8% from 75.3% prior, which is the

lowest level since late 2010.

COPPER

HIGHER CHINESE IMPORTS DOES NOT MEAN HIGHER DEMAND

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China Monthly Unwrought Copper and Product Imports ('000 Metric Tons) SHFE - LME Arbitrage (USD/Metric Ton)

China's import of unwrought copper and

products jumped 36% in March’16 from

the prior month to 570,000 tons, the

highest monthly amount since data

became available in 2001.

The surge may not point to a recovery in

domestic market copper demand, given

that inventory also climbed.

Bonded warehouse inventory, a form of

non-exchange reported stock, jumped

34% sequentially to 510,000 tons.

The imports have been on the back of

more arbitrage opportunities.

COPPER – MINE PRODCUTION STILL REMAINING HIGH

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World Mine Copper Production (mt) (L1)

World Mine Copper Production Yoy (%) (R1)

Copper mines boosted output by

41% in Peru and 17% in China, the

second and third largest producers,

offsetting Chile's 11% decline in

January.

Chile is the world's largest mined-

copper producer, accounting for

about 30% of global supplies.

Copper-mine production may rise

3.6% in 2016, according to a

Bloomberg estimates, with output

ramping up in Peru at Freeport-

McMoRan's Cerro Verde mine and

MMG's Las Bambas site

COPPER – BALANCE SHEET

Copper production for 2016 is expected to jump by

around 1.90%, which a year earlier posted around 7%

annual growth

Topmost producer Chile can ramp up their production

levels by 3.70% as per our estimates

From consumption side, Y/Y growth in 2016 can be

around 3.50%, a little less than the last year where it

increased by 4.80%

Demand from China is expected to pick up by 10%

compared to 3% increase in the previous year on the

back of lower prices and increased infrastructure

As per latest ICSG report, global world refined copper

market showed a 56,000 tonnes surplus in January,

compared with a 50,000 tonnes deficit in December

Production (MT)

Region 2014 2015 2016(E)

World Total 1612996 1727378 1759509

Asia Total 313875 398965 385183

Australia 81417 81600 82817

Canada 57043 65152 65368

Chile 523500 495300 513620

China 136000 153200 156655

Europe Total 132680 131969 131633

Indonesia 36741 47476 38448

NAFTA Total 225231 227868 245673

Peru 114068 186450 165510

Consumption (MT)

Region 2014 2015 2016(E)

World Total 1881301 1971782 2039487

Asia Total 1406058 1471624 1569616

China 1054207 1089495 1201537

Europe Total 262052 267581 242669

Germany 73247 90984 74692

Japan 80194 74910 79410

NAFTA Total 156442 169657 171054

COPPER – WAREHOUSE STOCKS & CANCELLED WARRANTS

LME copper cancelled warrants have

been slumping since Mar’16, which

witnessed around 10% jump in Feb’16

M/M.

Deliverable stocks in Shanghai Exchange

is showing downside move in April, which

has been continuously building up since

past three months.

LME copper stocks is slumping since

Feb’16.

With degrade in Chinese appetite, extra

copper is being exported by the country.

Chinese government companies which are

the largest consumer in the country like

State Grid and Railways have curtailed

their future spending in order to pay back

their previous debts.

COPPER: FUNDAMENTAL OUTLOOK

Copper has China as its main and largest consumer, where a slight recovery in the PMI, imports and industrial

production has helped some recovery in the first quarter.

Going ahead, the metal is likely to dance to the tunes of trends in the real demand from China as the actual

demand from China is still unclear. The high amount of imports are expected to be on the back of arbitrage

opportunities and the financing deals and not due to the real demand.

Additionally, Tibet is likely to add 1,63,000 MT towards supply in an already oversupplied market while the

global surplus is even expected to remain high on lower demand.

The confusing picture in the LME, Shanghai inventories and the cancelled warrants also points towards a bleak

demand. This in turn is likely to keep the prices of the metal under check over the medium term.

Overall, with copper remaining in oversupplied markets where the pace of demand is not showing signs of

sustainable improvement, the prices are likely to remain weaker in the upcoming quarter. With some supply

disruptions coming some minor pullbacks can not be ruled out but looking at the broader fundamentals, the

recommendation remains to sell on rise.

COPPER: TECHNICAL OUTLOOK

Expected Trend: Bearish

Trend determining technical factors:

1. Prices are moving with a lower highs and lower

lows formation in monthly chart, forming a

bearish trend channel.

2. Short term exponential moving averages 8, 13

and 21 periods supporting for bearish trend.

3. MACD is in negative zone in monthly chart,

which holds bearish view for coming months.

4. RSI-14 is reading at 39.50 in monthly chart,

there is a down side potential till 30 mark.

Monthly MCCc1 4/30/2013 - 1/31/2017 (BOM)

Price

INR

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Value

INRKg

Value

INRKgQ2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1

2013 2014 2015 2016

Exchange Action Entry Target Stop Loss

LME Sell 5100-5120 4500/4300 5400

MCX Sell 338-340 300/285 365

ALUMINIUM

ALUMINUM- CHINESE EXPORTS DECLINE ON LOWER PREMIUMS

China's exports of unwrought

aluminum and related products fell 11%

during Jan-Mar 2016 to 1.08 million

tons Y/Y, mainly on a lower overseas

premium.

Average premiums producers charged

in addition to the LME price tumbled

76% in Singapore and 62% in the U.S.

from a year earlier.

Domestic aluminum prices gained 9%

over the first quarter, while overseas

prices only rose about 1%.

March exports jumped 50% from the

prior month as shipments picked up

after the Chinese New Year.

ALUMINUM- CHINESE OUTPUT MIGHT BE TOPPING OUT

China's primary aluminum output is

slowly coming down as smelters take

steps to cut capacity and delay the

ramp-up of new projects in a bid to

underpin prices.

The latest available data show

production was 2.53 million tons in

December, down 8% from an all-time

high in June.

The nation may have cut 4.91 million

tons of capacity in 2015, according to

the China Nonferrous Industry

Association and about 15% of capacity

in 2014.

ALUMINUM- BALANCE SHEET

Aluminum production in 2015 witnessed a growth of more than

1% on Y/Y basis.

Overall in 2016, production levels might witness a jump of more

than 5% Y/Y.

Total Asian contribution for aluminum production is around 65%

and in 2016, it is expected to show a growth rate of 10% Y/Y.

From consumption side, global consumption slumped by around a

percent.

Global consumption in 2016 shall witness a growth more than 7%

Y/Y in which China would be the top contributor.

Overall consumption from China shall witness a Y/Y growth of

around 13%.

Total aluminum output in China as per IAI in March was around

2.62 million tonnes from 2.07 million tonnes in Feb.

Production (MTs)

Region 2014 2015 2016(E)

World Total 4451491 4503405 4742839

Asia Total 2979411 3017085 3344659

Australia 136400 137600 129192

Canada 241750 257863 248766

China 2293117 2310068 2592661

Europe Total 658428 696217 632551

NAFTA Total 383041 371287 369210

Russia 295400 295700 276342

Consumption (MTs)

World Total 4354023 4318102 4636817

Asia Total 3007694 3057684 3345108

China 2250465 2269729 2568175

Europe Total 596510 612279 568054

NAFTA Total 538393 473895 551621

Russia 51370 57663 54798

ALUMINUM- WAREHOUSE STOCKS AND CANCELLED WARRANTS

Aluminum stocks at LME warehouses

showed a monthly decline since

starting of this year.

As per latest update, stocks jumped

more than 50% in April month.

Cancelled warrants of aluminum on the

other hand has been rising on monthly

basis from starting of this year.

Last year the cancelled warrants

showed monthly decline in almost

every months.

On YTD basis, March’16 witnessed

biggest gains in cancelled warrants this

year.

ALUMINUM: FUNDAMENTAL OUTLOOK

Supply and demand dynamics are improving outside China, with slower growth in capacity, more facility

closures and a better outlook for demand. In China, by comparison, low-cost capacity continues to come online.

China accounts for 50% of total demand and supply of global Aluminum therefore its China and the rest of the

world as the major players of Aluminum.

Use of aluminum in the power grid is supportive for prices, while the opening of new industrial parks in China is

also likely to boost the Al demand. However, we have already seen a good rally in the prices from lower levels,

therefore further gains hereafter are uncertain.

Prices can remain capped on account of direct power sales as it could pare the cost for smelting by-passing

grids which could bring some savings to the old and high cost smelters, that would keep them in operation.

Overall the outlook remains bleak as the slowdown in the property segment is likely to weigh on the Al prices,

whereas higher prices is further expected to postpone the demand.

ALUMINUM- TECHNICAL ANALYSIS

Expected Trend: Bearish

Trend determining technical factors:

1. Prices are moving in a wave pattern in

weekly chart, currently impulse wave

1-wave 4 has completed and wave 5

is in progress.

2. Wave 5 expected target is minimum

Rs.90.20 which is 61.8% of Fibonacci

projection level of wave 3 to wave

3. RSI-14 approached over bought zone

which may limit rally for coming

weeks.

4. Trend line resistance seen at 111.50,

which may act as crucial resistance

for coming week.

Exchange Action Entry Target Stop Loss

LME Sell 1680-1690 &

1740-1750 1470/1400 1820

MCX Sell 110.00-110.50 &

115.00-115.50 98/91 121

NICKEL

CHINA NICKEL IMPORTS vs STAINLESS STEEL PRODUCTION

Chinese Ni based stainless steel

production in 2015 slumped around 4%

on Y/Y.

As per latest updates available, the

same slumped more than 20% in Feb

month on M/M basis.

China customs refined nickel imports

last year almost doubled compared to

2014 average imports.

In 2016, as per latest updates, imports

slumped by around 15% M/M basis in

Feb month.

With decline in domestic demand, SS

production has gone down despite of

magnified imports by China.

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China customs refined Ni imports(metric tonne) China Ni based SS prod(metric tonne)

CHINA IMPORTS vs SHANGHAI FUTURES DELIVERABLE STOCKS

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China customs refined Ni imports(metric tonne)

Shanghai futures ex Ni deliverable stocks total(metric tonne)

Nickel deliverable stocks at Shanghai

futures YTD moved up more than 2 times

compared to last year.

INSG report released in the month of March

showed around 8,100 tonnes deficit in Jan

month.

As per the data, the production of nickel in

January month fell around 6.20% i.e. from

162,100 tonnes in Dec’15 to 151,900 tonnes

in Jan’16.

Demand in Jan’16 stood around 160,000

tonnes, up from 158,300 tonnes in Dec’15,

though down by 2% from a year ago.

Nickel mine supply in Jan’16 month slashed

by 11% to 158,064 tonnes from 177,600.

NICKEL – GLOBAL SUPPLY SCENARIO

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Global Nickel Mine Production (mt) Global Nickel Mine Production Yoy (%)

A 70% plunge in nickel prices

since 2014 resulted in a 6.1%

contraction in global mined nickel

production in 2015.

Despite of 23% decline in mine

production from Philippines it is

still world’s biggest exporter to

China post Indonesian ban.

Mine supply could rebound if

downstream operations start up in

Indonesia. Norilsk, the world's

largest nickel producer, projected

its 2016 output at 225,000-

235,000 tons, about 10,000 tons

more than last year.

NICKEL: SUPPLY DEMAND

Nickel production last year witnessed a yearly growth of

around 1%

This year, production levels are estimated to witness a jump of

around 10%

China’s Y/Y production in 2016 is estimated to grow around

35% and thus the whole Asian output shall surge by 20%

From consumption side, global demand in 2016 is estimate to

move down by more than 10%, which last year witnessed a

growth more than 35%

Total Asian consumption in which China is the top most

contributor is estimated to move down by around 18% on Y/Y

basis

Production (MTs)

Region 2014 2015 2016(E)

World Total 163078 164573 181486

Asia Total 72283 72766 88077

Australia 12334 10400 12894

China 50096 44800 61399

Europe Total 42776 41206 40478

NAFTA Total 11724 13300 11930

New Caledonia 6021 7385 7388

Norway 7700 7734 7763

Consumption (MTs)

World Total 121401 166683 161044

Asia Total 84371 125576 124550

China 60280 85278 91596

Europe Total 21616 24999 19960

NAFTA Total 12870 10067 11648

NICKEL- WAREHOUSE STOCKS AND CANCELLED WARRANTS

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LME Ni warehouse stocks(tonnes) LME Ni cancelled warrants(tonnes)LME nickel warehouse stocks jumped by

40% Y/Y in 2015

Cancelled warrants in 2015 jumped more

than 35% on yearly basis

Both cancelled warrants and warehouse

stocks have been declining on monthly basis

since Feb’16

Mar’16 witnessed biggest cancelled

warrants fall on monthly basis since Jan’12

On monthly basis, Ni stocks at LME

warehouses jumped more than 5%, which

was biggest gains since Oct’14, suggesting

dull demand for the metal

NICKEL: FUNDAMENTAL OUTLOOK

Concerns about an economic slowdown in China and the strong U.S. dollar caused the price of nickel to dive

along with other commodities.

China is expected to boost its refined nickel imports for coming three years after the State Reserve Bureau

confirmed with the industry sources.

With fall in availability of nickel pig iron, which is an alternative used for production of stainless steel, China is

expected to buy refined nickel between 100,000 and 150,000 tonnes in coming three years.

This year, around 30,000- 60,000 tonnes have been purchased by the Chinese industries so far.

Total nickel inventory in China by the end of March 2016 was around 202,000 tonnes, which is around 300%

compared to March 2015 inventory levels.

Thus, with expected magnified demand from the Chinese market, Nickel shall show positive trend this quarter.

NICKEL: TECHNICAL OUTLOOK

Expected Trend: Bullish

Trend determining technical factors:

1. Last month candle stick formed an

inverted hammer pattern in monthly

chart and this month prices are trading

above it conforming the formation,

which is trend reversal in nature.

2. RSI-14 periods in monthly chart

turning up from over sold level of

17.95 and currently reading at 36.34

mark, which supports bullish trend for

coming months.

3. Resistance is seen at Rs.699 and

Rs.810, which are 23.6% and 38.2%

of Fibonacci resistance from Rs.1280

to Rs.520.50 respectively.

Exchange Action Entry Target Stop Loss

LME Buy 8880-8900 &

8400-8420 10400/11000 7600

MCX Buy 590-595 &

560-565 690/730 519

ZINC

ZINC- MINE PRODUCTION STALLING

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Global Zinc Mine Production (mt)

Global Zinc Mine Production Yoy%

Closings of old zinc mines, such as

the 500,000-metric-ton Century site

and 150,000-ton Lesheen mine, and

planned cuts by big producers could

keep global output little changed in

2016 from last year.

Global zinc-mine output started the

year with a January decline of 2.2%,

or 1.05 million tons.

Australia's 6.8% increase in output

offset the 4.3% drop in China, which

accounts for 36% of global supplies.

GLOBAL REFINED ZINC STATUS

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Global Refined Zinc Balance (mt) China's refined zinc production

rose 1.3% in January, extending a

5.6% jump in 2015 that was fueled

by favorable treatment charges

and capacity expansion.

An announced cut of 500,000

metric tons at China's zinc

smelters has been slow to take

hold.

Global production in January still

shrank 1.4% from a year earlier to

1.14 million tons as concentrate

availability tightened due to

production cuts at mines.

LEAD- MINE SUPPLY MAY TIGHTEN

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Lead Mine Production (000's mt) Rate Of Change (12)

Mine closings and maintenance in

Australia and intensifying

environmental pressures in China

limit the growth of lead mine

output, which could also lead to a

decline in refined lead production.

The global balance in refined lead

may hinge on production and

demand in China.

Australia's production dropped

9.7%, due largely to maintenance

at the Paroo Station mine and the

shutdown of the Century mine.

China's output slid 25.2% amid the

imposition of stricter environmental

rules.

ZINC- BALANCE SHEET

Global zinc production in 2015 slumped by 3% on yearly

basis.

Chinese production in 2015 was down by more than

10%.

Worldwide production in 2016 is estimated to decline

around 0.40%.

From consumption side, overall consumption on Y/Y

basis in 2015 declined by 0.60%.

In 2016, expected consumption shall move up more than

a percent on yearly basis.

Consumptions from China shall grow by around 3% in

2016 and thus, could add positivity to the metal.

Production (MTs)

Region 2014 2015 2016 (F)

World Total 1173485 1137222 1133182

Asia Total 760748 733511 738530

China 543588 485673 503750

Europe Total 211126 205857 206571

NAFTA Total 99903 100074 97197

Consumption (MTs)

World Total 1148876 1141648 1154802

Asia Total 784719 783230 799824

China 572508 549762 565261

Europe Total 204614 201342 195525

NAFTA Total 100619 89466 99117

ZINC- LME WAREHOUSE STOCKS

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LME Zinc cancelled warrants LME warehouse stocks Zn Zinc stocks at LME warehouses dropped by

more than 28% in 2015 on Y/Y basis

In 2016, warehouse stocks slumped more than

15% as per the latest updates

Cancelled warrants for zinc slumped more

than 25% in 2015

On monthly basis, cancelled warrants jumped

around 50% in November 2015, which was

highest monthly gains since September 2014

In 2016, cancelled warrants mostly witnessed

slumps other than Feb month, which showed

around 34% rise on monthly basis

Percentage of cancelled warrants to total

stocks last year was around 19%, which in

2014 was around 18%

ZINC: FUNDAMENTAL OUTLOOK

An announced cut of 500,000 metric tons at China's zinc smelters has been slow to take hold. Global production

in January still shrank 1.4% from a year earlier to 1.14 million tons as concentrate availability tightened due to

production cuts at mines.

Average zinc prices rose 13% to $1,683 a metric ton on the London Metal Exchange during 1Q, recovering from

the lowest price since the financial crisis, but still down 20% from a year earlier.

Mine closings and supply cuts from big producers may not be enough to boost near-term prices, yet a possible

shortage of concentrate could lead to declining refined zinc production. The global balance in refined zinc may

be pivotal for production and demand in China. For the upcoming quarter we remain bullish on Zinc and

recommend a buy

ZINC: TECHNICAL OUTLOOK

Expected Trend: Bullish

Trend determining technical factors:

1. V-bottom pattern has formed in weekly

chart and currently trading above neck

line with expected target of Rs.144

2. Currently prices are trading above

50% Fibonacci resistance of recent

fall.

3. Short term moving exponential moving

averages 8, 13 and 21 periods are

supporting for bullish trend in monthly

and weekly chart.

4. RSI-14 is reading at 57.78 in monthly

chart, there is an upside room till 70

mark.

Exchange Action Entry Target Stop Loss

LME Buy 1860-1870 &

1780-1790 2100/2190 1670

MCX Buy 123.00-123.50

& 118.00-

118.50 134/140 114

LEAD

GLOBAL LEAD PRODUCTION TO REMAIN MUTED

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-11

Sep

-10

May-1

0

Jan

-10

Sep

-09

May-0

9

Jan

-09

Sep

-08

May-0

8

Global Refined Lead Production (mt) R1

Global Refined Lead Surplus/Deficit (mt) R2

Global growth in refined lead

production could remain subdued in

2016 due to aging mines and capacity

closings amid low prices.

Weakening lead demand in China led

to a 4.9% price decline in 1Q after a

3.5% loss in 2015. Chinese lead

refiners responded by slashing

production.

China, the world's largest lead miner,

also produced 18% less from mines in

2015 than a year earlier, causing global

refined lead output to contract 8.3% to

10 million metric tons.

LEAD- BALANCE SHEET

Global lead production in 2015 slumped more than 8%

on yearly basis.

Overall production worldwide in 2016 is estimated to

jump by around 3%.

Worldwide consumption in 2015 dropped by more than

10% on yearly basis.

Drop in Chinese consumption was more than 25% Y/Y

in 2015.

In 2016 global consumption is estimated to grow more

than 3%.

Chinese lead consumption is forecast to show an

annual growth of more than 6.50%.

Production (MTs)

Region 2014 2015 2016

World Total 930851 849312 875512

Asia Total 586639 474506 508302

China 423396 313848 334774

Europe Total 154969 162352 162878

NAFTA Total 135363 148170 140981

Consumption (MTs)

World Total 933821 832802 860054

Asia Total 611360 496466 527730

China 420279 309865 330342

Europe Total 134893 139528 134913

NAFTA Total 147583 156687 159116

LEAD – LME WAREHOUSE STOCKS

Lead LME warehouse stocks in 2015 slumped

more than 10% on yearly basis.

In 2016, YTD slump in total warehouse stocks

is around 2% as per the latest data available.

Cancelled warrants in 2015 stood almost

double compared to 2014 average levels.

On monthly basis, Jan’16 witnessed a jump of

more than 80% in cancelled warrants.

Percentage of cancelled warrants to total

warehouse stocks this year is averaging more

than 40%, which last year was around 25%. 0

20000

40000

60000

80000

100000

120000

0

50000

100000

150000

200000

250000

LME Cancelled warrant Lead Total LME warehouse stocks lead

LEAD: FUNDAMENTAL OUTLOOK

Global mined lead production started 2016 with a 5.9% decline in January, following a 20% contraction in 2015,

according to ILZSG. Output fell in Australia and China, which account for 60% of global supply.

Global refined lead demand declined 8.3% in 2015, with slumps of 17.9% in China and 5.1% in the U.S. That left

the surplus at a three-year high of 63,000 metric tons. The trend is expected to reverse in 2016, with demand

increasing 2.6% to 11.1 million tons, according to the International Lead and Zinc Study Group.

China, which accounted for 38.6% of the world's refined lead consumption in 2015, may propel the recovery

with its use of lead in industrial batteries and automobiles

LEAD: TECHNICAL OUTLOOK

Weekly MLDc1 10/4/2014 - 6/25/2016 (BOM)

Price

INR

Kg

95

100

105

110

115

120

125

130

Value

INR

KgN D J F M A M J J A S O N D J F M A M JQ4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016

Expected Trend: Bullish

Trend determining technical factors:

1. Prices are moving in a Bullish trend

channel, which is bullish in nature.

2. Channel trend support at Rs. 114.20

and resistance at Rs.132.70.

3. Short term exponential moving

averages 8, 13 and 21 periods are

supporting for bullish trend.

4. RSI-14 is in neutral zone reading at

53.32, turning positive from a low of

41.55

Exchange Action Entry Target Stop Loss

LME Buy 1700-1710 &

1640-1650 1950 1520

MCX Buy 114.00-114.50 &

110.00-110.50 132 100

43

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Prepared by:-

Function Analyst

Head of Research-Commodity Veeresh Hiremath

Senior Market Strategist Himanshu Gupta

Fundamental Analyst Ritu Raj Jha

Technical Analyst Prabhakar Reddy