quarterly metals report january 2015

Quarterly Metals Report January 2015 Analysis & forecasts for Base &

Precious Metals, Iron Ore & Steel

Contents

Summary 1

Market Overview 2

Aluminium 5

Copper 7

Lead 9

Nickel 11

Tin 13

Zinc 15

Steel & Iron Ore 17

Gold 19

Silver 21

PGMs 21

Appendices 23

Disclaimer 30

Compiled and Published by Sucden Financial Limited on 20 January 2015

Metals Comments/Analysis:

William Adams, Head of Research, FastMarkets.com

Steve Hardcastle, Head of Client Services, Sucden Financial Limited

www.sucdenfinancial.com/metals

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Financial Conduct Authority.

MARKETING COMMUNICATION

Quarterly Metals Report

Summary

January 2015

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Marketing Communication

Summary

Aluminium - Weaker crude oil prices will reduce the energy input costs for production, boosting the supply outlook as

marginal costs come down. Given the current lacklustre demand outlook prices are expected to remain rangebound as the new

LME load-out rates see warehouse queue lengths increase once more. Prices are expected to range between $1,765 and

$1,890 in the first quarter.

Copper - Lower crude prices have also added significant downward pressure on copper. While a previous forecast of the red

metal was for a surplus in 2015, this now comes into question. Depending on how the situation unfolds in the eurozone and if

China can maintain growth above 7%, we could see support around $5,300-5,500 with spikes lower on speculative shorts and

conversely spikes higher on short covering. In the first quarter we would look for a $5,500-6,200 range.

Lead - We maintain our bullish fundamental outlook for lead in the medium term despite its recent slide lower. Industrial usage

remains resilient and with global growth momentum slowly grinding higher the metal, which looks oversold in the short term,

could quickly spring back to the upside with a possible target of $2,100 in Q1 2015.

Nickel - After spiking higher in H2 2014, well ahead of the fundamentals, prices have found support around 2013’s base level.

The market is well supplied with exports of ore from the Philippines which when blended with Indonesian stockpiles enable NPI

producers to continue operations. Given NPI stockpiles in China are still around 7m tonnes, protracted gains could be limited in

excess of $17,200/tonne.

Tin - Prices have weakened substantially in recent months as Chinese buyers, in response to Indonesian attempts to firm up

market fundamentals have resorted to low grades from Myanmar. Chinese domestic production continues to rise which

struggles to justify a bullish outlook for tin. As a result we expect rangebound trading between $18,000-$20,500/tonne in Q1

2015.

Zinc - Having ran ahead of the fundamentals at the start of H2 2014, prices have come down considerably as supply remains

plentiful. Supply tightness isn’t expected until the second half of the year. Any material declines in LME stocks could act as a

precursor to a reversal higher with an upside target of $2,375/tonne, but not before potentially testing support towards

$2,050/tonne on any deterioration in the global macro outlook.

Iron Ore and Steel - Falling crude prices have significantly reduced freight rates, bringing Brazilian material back into

contention with Aussie fines for Chinese buyers. Spikes above $70/tonne for benchmark material have been short lived and with

the finished steel market well supplied we expect prices to remain under pressure throughout the first quarter of the year.

Gold - Dollar strength acts as a cautionary note to higher gold prices, with prices also subdued throughout Q4 2014 as

investors demanded higher yielding assets. Physical demand seems to offer firm support for the yellow metal around current

levels and with demand expected to remain firm. As we approach Chinese New year we could see prices test levels towards

$1,300/oz.

Silver - A combination of weaker oil prices and a stronger dollar saw prices trade under pressure over the past few months.

Global investment demand as well as physical buying from Asia is set to improve throughout the year with $18/oz a possible

upside target. However, rallies could struggle to gain a footing on producer related selling.

PGMs - Palladium looks set outperform platinum over 2015. The growth in global vehicle sales and renewed ETF interest look

likely to fuel demand, with the dollar strength and commodity weakness acting as a drag.


Market Overview

January 2015

2


Market Overview

Outlook weak but stimulus may provide support – Last year started on an optimistic note, with expectations for

a recovery in Europe, stable growth in China and escape velocity to be reached in the US. The latter was achieved but Europe’s

recovery has stalled and credit tightness in China has slowed its growth further. The danger now is that low growth – or even

recession in Europe – will continue to act as a drag on China while Europe demands fewer exports. Key will be whether slower

growth outside the US acts as a drag to an otherwise impressive economic recovery. Either way, while much of the global

economy is in the doldrums, the US Federal Reserve may feel it’s in no hurry to risk its recovery by tightening monetary policy.

This less-than-bullish economic backdrop does not bode well for demand for industrial metals; still, a silver lining for the metals

may be a weaker dollar should the delay in tightening monetary policy mean the greenback has run ahead of the fundamentals.

Lower oil prices should eventually feed through to boosting global

GDP as well.

China, expect stability – China’s economy is slowing, – third-

quarter GDP fell to 7.3 percent from 7.8 percent in the corresponding

quarter of 2013. Its manufacturing PMIs were last at 50.1 (official) and

49.6 (HSBC) while its CPI was 1.5 percent compared with a 2013

average of 2.6 percent. This weakness is likely to prompt more

stimulus measures over and above the fast-tracking of $1 trillion of

infrastructure projects, which the metals markets have largely ignored.

More targeted stimulus/help is expected should growth continue to

slow. Given the power the Chinese authorities have and the fact they

still control many aspects of the financial system, it should be

assumed that they are massaging the economy in the direction they

want given the complicated wish list that includes creating

employment, controlling inflation, limiting price bubbles, cutting

pollution and avoiding the misallocation of resources, to name a few.

Above all, we expect China will do what is necessary to keep growth

around seven percent, so we would expect more stimulus packages

and rate cuts to keep the economy on track.

ECB likely to act – With Europe facing deflation and its

economy flat, the ECB must take action, but regional political

differences are hampering progress here. So while there has been

much talk that the ECB will do what is necessary, the plan of attack

seems stuck on the drawing board. To make matters more urgent,

Greece is also once again in the spotlight – it faces a new election

that could lead to an anti-bailout government being elected. If so,

the euro area could be plunged into crisis again. Whether the EU

can muddle along as it has in recent years without resorting to full

quantitative easing is doubtful, which suggests some form of


Market Overview

January 2015

3


stimulus will unfold. The return of the habit of ‘kicking the can down the road’ could easily provide markets with a confidence

boost. With EU GDP growth last at 0.2 percent, its manufacturing PMI at 50.6 and the EU flash CPI down 0.2 percent in

December, the current outlook in the EU is depressing, which increases the likelihood that stimulus measures will be called

upon. What impact these have on metal demand remains to be seen.

US strength continues for now – Third-quarter US GDP surprised on the upside at five percent and its manufacturing

PMI was last at 53.9 (it has admittedly eased from 59 in October but some negative impact from a slower global economy

should be expected given the strength of the dollar and weaker growth in other regions). The national unemployment rate has

also dropped to 5.6 percent, with the economy adding 2.99 million jobs in 2014 – all of which suggest the US economy is robust,

although one weak aspect of the December jobs report was that wages have barely kept ahead of inflation during the five-year

recovery. We wait to see whether the stronger dollar and weakness elsewhere produces too great a headwind for the US

economy.

Emerging markets at risk from stronger dollar and weaker China and Europe – Emerging market

currencies have been trending lower against the dollar, with the rupee reaching 64 from around 59 in June; the real has followed

suit, weakening to 2.75 from 2.20 over the same period; while the rouble has been hammered by sanctions and the plunge in oil

– it was last at 63 from around 35 in the first half of last year. The fall in the currencies, especially in Russia, is likely to

encourage producers to increase revenue by maximising output but the weaker currencies will put pressure on these countries’

dollar-denominated debt and will increase the cost of imports, all of which will probably be a drag on world growth. So the metals

will suffer a double whammy of weaker demand and more supply from emerging markets, we feel.

Qingdao aftermath – The Qingdao port scandal combined with credit tightness in China are likely to have prompted

considerable destocking last year, which has no doubt weighed on metals prices. Looking forward, although metal financing in

China may be difficult and costly, the practice is unlikely to be abandoned so we would expect some kind of recovery this year

as new practices are adopted. In addition, destocking cannot go on indefinitely so apparent demand may well pick up once the

destocking ends and is replaced by hand-to-mouth buying or, indeed, restocking/bargain hunting given the lower prices.

Dollar strength – The dollar took off in July last year,

with the dollar index rising to 92.53 in early 2015. The euro,

conversely, has fallen to a low of 1.1727, its lowest since

2005. This suggests that ‘kicking the can down the road’

indeed merely bought the eurozone some time but the

underlying problems have not gone away. Still, while the euro

has inherent weakness caused by a lack of growth, deflation

and slow progress on structural reforms, the dollar may have

run ahead of itself – it looks overbought on the charts. We

would therefore not be surprised by some consolidation in

the dollar and a rebound in some currencies, while the euro

follows its own fate. On its own, the stronger dollar will have

acted as a headwind for metal demand. If it spends time consolidating while awaiting the Fed's move on interest rates, any

pullback in the dollar may well help underpin the metals.


Market Overview

January 2015

4


Geopolitical risk – Last year the markets were

witness to much geopolitical unrest but the impact on

the markets was fairly minimal and when it was seen it

was short-lived. This suggests a high degree of

complacency, which is always a danger, but this is how

the markets now seem to handle such issues. With the

rouble and oil prices plunging, with emerging market

currencies weakening and with a risk that Greece

could vote to leave the euro, the world faces

considerable geopolitical risks that do not seem to be

priced into markets, especially equities. If any of these

events triggers a reduction in risk, industrial metals prices could be dragged down further. Still, if it raises demand for safe

havens, the bullion markets might well benefit, especially if they have put in bases.

Overall – The global economic outlook deteriorated in the second half of 2014 and has not improved yet. The chart opposite

shows downward-trending metal prices, with copper, tin and lead all below their respective levels at the start of 2014, while

nickel, zinc and aluminium have held up better. The latter three are waiting for supply issues to tighten the fundamentals, while a

move towards a supply surplus has hit copper and an increase in Chinese production has weakened tin. Quite why lead has

underperformed is harder to fathom.

Precious metals met with further weakness last year; there were bouts of strength but prices have generally consolidated at

lower levels (the exception is palladium). We expect bases are now in place across the precious metals complex; while the

PGMs look well placed to recover, users may not be in any hurry to restock given the economic climate. As for bullion, the focus

has now shifted away from institutional interest, which is bearish given the redemptions in the ETFs, to physical demand from

China and India, which is expected to continue to rebound after the disruptions in 2013 and 2014. Since we feel the dollar may

have run ahead of the fundamentals and given all the geopolitical risks, we are mildly bullish for the precious metals complex.

Equity markets remain at surprisingly high levels, supported by ultra-low interest rates while the ‘punch bowl’ shifts from the US

to Japan, China and possibly Europe. Low oil prices should produce cost savings that may boost household spending but, with

the Dow up 180 percent since the 2009 low and up 27 percent on its 2007 peak, the rally looks overextended. A correction

would probably dampen sentiment across the board, with the possible exception of gold.

With metal prices trending lower, we are looking for support to be found before too long. Some metals have stronger

fundamentals than others – notably nickel, lead and zinc – but given how dominant the downwards trend are and the subdued

economic outlook, it may take considerable base-building before confidence returns.


Aluminium

January 2015

5


Aluminium – Oil sell-off boosts supply prospects

Overall trend – Aluminium prices rallied to a high of $2,119 per tonne early in September from a low of $1,671.25 in

February before dropping back to $1,778, thereby retracing 76 percent of the gains. Prices are now around the upper levels of

the former sideways range that formed the 2013-2014 base. In our July report last year we thought the rally was premature and

that prices were running ahead of the fundamentals - as well as being counter-productive because higher prices were

encouraging idle capacity to be restarted. Lower energy prices (oil and coal) seem to be driving the deeper pullback, lowering

producers’ costs of output, which is providing an incentive to raise production, as the latest International Aluminium Institute (IAI)

data shows.

Production climbs, helped by lower energy prices – Global aluminium output in November averaged 151,700

tonnes per day (tpd) compared with 146,100 tpd in October and an average of 142,100 tpd in November 2013. In the first 11

months of 2014, production averaged 144,920 tpd, which means output in November on an annualised basis was running some

2.5 million tonnes above the average in the first 11 months of the year. Looking forward, producers now face some

crosscurrents - some will be able to take advantage of lower energy prices to reactivate idle capacity but lower LME aluminium

prices will start to squeeze operating margins at others. So in the short term lower oil prices are likely to remain a bearish

influence, especially if it encourages more exports of Chinese aluminium semis. But if lower benchmark prices start to prompt

talk of more output cuts, bargain-hunting may well reappear. As always with aluminium, the demand profile is second to none,

so at the first sign of supply restraint consumers and investors are likely to return as buyers. This in turn could trigger short-

covering and restocking and another upward run in prices.

New LME rules may have little impact on availability – If the new LME warehousing rules are implemented this

year, leading to a faster outflow of metal, it does not necessarily mean availability will increase - the metal leaving warehouse

Global supply/demand balance in refined aluminium (in millions of tonnes)

2011 2012 2013 2014 (e) 2015 (f)

Production 44.7 47.8 50.8 53.8 56.5

Consumption 42.8 47.4 50.4 53.6 56.5

Balance +1.9 +0.4 +0.4 +0.2 0

Price $2,400 $2,000 $1,860 $1,900 $1,950

Summary

Aluminium prices have reversed

much of the gains of the second and

third quarters last year that were

prompted by the delay to the new

LME load-out rates, which in turn

saw LME warehouse queues grow

again. High ‘all-in’ prices and, more

recently, weaker energy prices have

encouraged producers to step up

output – the fact this has coincided

with a deterioration in the economic

outlook for the global economy ex-

US has dampened sentiment, which

is leading to the current price

correction. Since oil prices may well

remain low for a few quarters and

the new LME load-out rates could

increase availability, we expect

prices to remain rangebound.

Source IAI, WBMS, FastMarkets forecasts


Aluminium

January 2015

6


could simply just go into off-market financing deals. We do not think there will be much pick-up in availability in the market until

interest rates rise to a level that makes financing metal economically unviable. Given concerns over slower global growth, the

US Federal Reserve may indeed delay any rate rises or the rate rises may have a negligible impact on the financing model. The

aluminium industry may therefore have more time to reduce the stock overhang but to do so it will need to limit production

increases - this will require keeping ‘all-in’ aluminium prices sufficiently low.

Demand growth remains robust – Aluminium continues to enjoy strong demand growth, especially for auto-sheet.

With China’s growth slowing and with Europe trying to fight deflation, there are high expectations for more stimulus measures,

which seem likely. In addition, lower oil prices should provide a worldwide boost to household and business spending, which

should help to counter some of the other negative factors affecting growth such as tight credit in China. We still expect relatively

strong growth overall while aluminium gains market share from copper and galvanised steel.

Prices likely to remain rangebound – With the aluminium market expected to be roughly balanced in 2014 and 2015,

the default forecast would be for firmer prices but high stocks. More metal leaking from China and tentative global economic

growth are likely to keep prices rangebound. Physical premiums may also be near to peaking either because more Chinese

metal is exported or as tightness in the spreads attracts metal out of financing deals. Prices are expected to range between

$1,765 and $1,890 in the first quarter.

The dip in the forward spreads in which 3-15 months dropped to single figures and c-3s moved into backwardation shows how the market tightened in November – such shifts make financing difficult.

LME stocks continue to fall at a regular pace. With the forward spreads back in contango, much of the outflow is expected to go into off-warrant financing deals. Stocks are still high.

Cancelled warrants are easing again ahead of LME rule changes. The tightness in November also led to some cancelled warrants being rewarranted.

Physical premiums in the US remain elevated - the drop in LME prices is likely to prompt a pick-up in physical demand, which may boost premiums further in the short term.


Copper

January 2015

7


Copper – Down trend dominates

Overall trend – The economic slowdown in China and Europe and a larger supply surplus this year are the main driving

forces behind lower copper prices. Given recent currency turmoil and the rallying US dollar, growth in other emerging markets

may slip, all of which suggests there is little to be bullish about. Still, the outlook could change if China were to step in with a

game-changing stimulus package but that seems unlikely - the 2008 package created its own problems, which the government

seems keen not to replicate. While the latest one-trillion-dollar fast-tracking of infrastructure projects made in early January had

little immediate impact on the market, such initiatives will clearly provide some support to demand. With prices still above the

marginal costs of production, which we put closer to $5,500, prices may well move lower but we would expect scale-down

buying in the $5,300-5,500 range. Still, lower oil prices and weaker commodity currencies will lower the marginal costs levels so

support levels may shift lower too. Even so, the projected surplus is not that large, especially given that supply disruptions are

an ever-present feature in the copper market and that China - as a net buyer - may well be prepared to increase its strategic

purchases, all the more so if prices approach the marginal costs of production.

China remains key – With China accounting for 45 percent of global consumption, changing trends there will be all-

important. One key area where demand is likely to be hit hard is the housing sector - not only will falling property prices deter

housing starts but potential buyers may be reluctant to buy until prices bottom out, which could have a negative impact on

demand for white goods and appliances. The situation will, however, breed pent-up demand to be met at a later date.

Conversely, government infrastructure spending after the recent approval for rail, airport and port projects as well as the

continuing investment in the state power grid are all potentially big consumers of copper wire. The tighter credit environment in

China has also led to a degree of destocking in 2014 so there is potential for apparent demand to pick-up if - as is likely - Beijing

eases monetary policy.

Global supply/demand balance in refined copper (in millions of tonnes)

2011 2012 2013 2014 (e) 2015 (f)

Production 19.6 20.13 21.06 22 22.75

Consumption 19.7 20.39 21.33 21.9 22.55

Balance -0.1 -0.26 -0.27 0.1 0.2

Price $8,810 $7,946 $7,250 $6,860 $6,300

CHART WITH TITLE & SOURCE

Summary

Copper prices are trending lower.

Having moved below numerous lows

established between 2011 and 2014,

the chance that prices fall back to test

support in the $5,300-$5,500 area has

already happened. With a supply

surplus looming, which the ICSG

forecast at 393,000 tonnes this year,

the fundamentals are mildly bearish.

Much will ultimately depend on whether

China manages to keep growth above

seven percent, whether the ECB can

reignite growth and whether the US can

avoid being dragged down by the

weakness elsewhere. As well, we feel

stocks are not very high and China’s

structural supply deficit will mean it

becomes a scale-down buyer,

supporting the price. Source: ICSG, FastMarkets forecasts


Copper

January 2015

8


The copper market ex-China – International Copper Study Group (ICSG) forecasts are for copper demand to have

grown 3.5 percent in 2014 and our forecast is for growth outside China of around 1.5 percent in 2015, fuelled by strong growth

in the US, but offset by subdued growth in Europe and negative growth Russia. With growth in China and emerging markets

slowing and Europe flirting with recession, there is a big question mark over how ring-fenced the US economy will be as its

export market slows and as low oil prices lead to retrenchment in the shale oil and gas industry, which has been a driving force

in US manufacturing in recent year.

Funds hold bearish stance in the US and getting less bullish on the LME – The managed funds trading

on Comex turned net short again in mid-August - the position is now net short 35,053 contracts, which is the highest level we

have on record since 2011. This makes the market vulnerable to short-covering that could either provide support to prices or

else drive a short-covering rally. On the LME, money managers are net long 25,258 lots, down from 33,434 lots in September

and 48,460 lots in July when the data series began. The drop in the net long position has come about on fairly even amounts of

long liquidation and fresh short selling, according to LME data. Given the weakness in commodity prices generally, it is

surprising that the LME fund position has not reflected the US fund position more.

Looking weak for now – Fundamentally, technically and economically, it looks as there may be more room on the

downside for copper prices but, with the marginal costs of production not too far below current prices and with potential for

stimulus packages in China and Europe, we would expect range-trading to continue at $5,800-6,800 this year, with the upper

prices levels likely to be seen during short-covering rallies. In the first quarter we would look for a $5,500-6,200 range.

LME stocks are edging higher while the backwardation attracts metal into LME-registered warehouses. Stocks are not high, accounting for around 0.8 percent of annual consumption. The low level of cancelled warrants also suggests the market is well supplied.

The forward curve is in backwardation, although between five and 10 years out the curve is flat at around $145/t back. The presence of the backwardation may well be deterring shorts on the LME. One entity holds 50-79% of LME warrants.

The funds' net position is getting shorter and the gross short position is near its high, while the gross long is in low ground. The peaks in the gross short position tend not to last too long – this may mean short-covering lies ahead.

China’s copper imports have recovered in recent months, maybe because having deferred shipments earlier in the year because of the negative arbitrage it had to import more under term contracts as the year came to a close.


Lead

January 2015

9


Lead– Looking for catalyst to trigger upside price reversal

Overall trend - The lead market probably ended 2014 relatively balanced after recording a 15,000-tonne surplus in the first 10

months of the year. If it moves into a deficit this year as expected, tighter supply should provide greater upside price potential.

While lead therefore looks under-priced, we believe it probably needs a catalyst to inject upside momentum and trigger a

renewed rally - it got ahead of its fundamentals after rallying strongly last year after the market latched on that several large

zinc/lead mines would reach the end of their productive lives in 2015.

Automobile demand – Auto demand remains strong in the US and China, driving lead consumption through OEM (original

equipment lead-acid) battery demand. US auto sales in December at 16.9 million units on an annualised basis were up 4.9

percent while Chinese vehicle sales in 2014 rose 6.9 percent to 23.5 million units. We expect this trend to continue - rising

economic momentum should fuel consumer confidence, unlocking delayed demand. While European auto sales of 11.6 million

units in January-November were up 5.7 percent, sales have started to wane of late as economic momentum in the eurozone

continues to falter. With the bloc believed to be sliding into a deflationary spiral, this is unlikely to change in the near term.

Automobile market – New emission regulations have led to the use of stop/start batteries in the US and EU, which should lift

consumption via the requirement of bigger batteries and more frequent replacements. Beijing’s continued crackdown on air

pollution should also provide a further boost as older models that do not meet new regulations are replaced; however, this may

be countered in part by a policy to reduce vehicle registrations in major cities. With the oil price having fallen significantly

recently, reducing fuel and therefore travel costs, we would expect increased demand for vehicles to provide a further boost to

lead consumption.

Global supply/demand balance in refined lead (in thousands of tonnes)

2010 2011 2012 2013 2014 (e) 2015 (f)

Production 9,850 10,598 10,541 11,224 11,550 11,850

Consumption 9,812 10,441 10,481 11,225 11,550 11,950

Balance 38 157 60 -1 -0 -100

Price $2,172 $2,402 $2,062 $2,150 $2,120 $2,155

Source: ILZSG, WBMS, FastMarkets

Summary

Lead's medium-term fundamentals

remain bullish thanks to its key

industrial uses; with global

economic momentum set to keep

rising, these are set to improve.

While the market looks oversold in

the short term after getting ahead of

its fundamentals, we believe the

price potential is to the upside - the

metal looks undervalued. The

market is expected to move into a

more meaningful supply deficit in

2015, bolstering prices as available

supply tightens. With mine

production growth likely to fall this

year and global economic

momentum to keep rising,

bolstering consumption, the market

is expected to move into a deficit of

around 100,000 tonnes in 2015.


Lead

January 2015

10


Battery substitution – Lead-acid batteries (LAB) are starting to lose their monopoly of the battery world to lithium-ion

batteries. They are expected to start to replace LABs in the e-bike market but the transition is likely to be slow so the effect is

unlikely to show up in the short term. China’s 4G network roll-out, the largest in the world, had been expected to boost lead

consumption substantially via large lead acid storage batteries. But because 4G stations require less power and space due to

reduced equipment size, lithium batteries are now believed to more suited to the role. Substitution would mean reduced

expected consumption, alleviating future supply tightness.

Secondary market – Lead’s secondary market is second to none - most lead is recycled - but it remains a price sensitive

market. Due to the recent run of low prices, scrap supply is tight, putting pressure on secondary producers. But with available

supply set to tighten further due to reduced mine supply later in 2015 and with scrap shortages likely to continue while prices

remain low, price gains seem likely before too long, which should start to bring scrap metal back to the market. The maturing e-

bike market is also likely to bolster secondary supply further as lead-acid batteries are replaced by lithium-ion batteries.

Zinc has been trading at a premium to lead since June when both were driven higher by speculation of future tightness. Both sold off after getting ahead of their fundamentals but the influence of lead’s considerable secondary market is evident in the size of its drop compared to zinc. Still, given mine closures and a possible deficit this year, upside price potential remains.

The cash/future prices, which have been falling since the July high when lead got ahead of is fundamentals, are continuing lower after a brief rise into the end of 2014. Still, the contango remains supported, indicating that perceived future tightness from reduced supply continues to spur future buying.

LME lead stocks at 220,775 tonnes are below the December peak of 229,075 tonnes and up 30,400 tonnes from the June low. Stocks were initially bolstered by the Qingdao probe tightening credit conditions, dampening financing demand. This led to off-warrant metal that would normally be financed in China moving to LME-listed warehouses to certify ownership, highlighting the risk of further metal moving from East to West, bolstering supply ex-China and putting LME prices under downside pressure.

Lead stocks have suffered increased volatility of late and prices seem to be trading inversely to LME stocks, which is not surprising given LME lead stocks are relatively low. But with supply tightness forecast for next year due to several large zinc/lead mine closures, we expect stock drawdowns to start to bolster prices as the supply tightness moves the market into a deficit.


Nickel

January 2015

11


Nickel – Waiting for deficit to arrive

Overall trend – After last year’s false start in which nickel ran up to $21,625 per tonne from around $13,300, prices have

pulled back aggressively to a low of $14,625. This took prices back to the upper levels of the base that was established in the

second half of 2013. We would expect this base to provide strong support - the fundamentals are set to improve this year,

although with more than 400,000 tonnes of nickel in LME-bonded warehouses there will be no shortage per se although the

metal in warehouse will not necessarily be for sale at current price levels. Still, there are no dominant holders of the warrants.

Given the sharp rally and the slump in prices, we would imagine the investment community and consumers will be nervous

about positioning themselves too early so we would not be surprised by a gradual price recovery initially that could gain

momentum as confidence returns.

2015 – the shift to supply deficit delayed – The ramp-up of nickel ore exports from the Philippines was the main

reason why Chinese NPI production has been able to remain as high as it has. By blending Philippine ore with stockpiled

Indonesian ore, rotary kiln electric furnace (RKEF) producers have not depleted their stockpiled high-grade Indonesian ore as

fast as originally thought. But the Philippine ore is not a full substitute - RKEF facilities still need to mix it with Indonesian

stockpiles that are running down (see chart on next page). There are two takeaways from this – first, it seems likely that NPI

production in China will slow more markedly later in the year; but second, the Chinese have proved very entrepreneurial in

finding cheap nickel units – as they proved in 2006 and 2007 when NPI started to feature as a main source of nickel supply and

once again after the Indonesian ore ban. Perhaps the next surprise will come from how fast NPI facilities in Indonesia are

commissioned - the current consensus is that the ramp-up in production will be slow.

Rise in LME stocks weigh on sentiment – Combined with the continued high level of NPI production in China, the

59-percent rise in LME stocks to 415,000 tonnes has been another factor that turned sentiment bearish from extremely bullish in

the first half of 2014. The stock rise, however, is not fundamentally driven but is related to invisible off-market inventories

Global supply/demand balance in refined nickel (in thousands of tonnes)

2011 2012 2013 2014 (e) 2015 (f)

Production 1,640 1,785 1,970 1,970 1,930

Consumption 1,625 1,681 1,790 1,940 1,980

Balance +15 +104 +180 +30 -50

Price $22,853 $17,535 $15,004 $16,867 $18,750

Source: INSG, FastMarkets forecasts

Summary

Nickel definitely ran ahead of the

fundamentals in the first part of 2014

and is now paying the price. The

combination of a surge in exports of

Philippine ore, the blending of this with

Indonesian stockpiled ore - enabling

NPI producers to keep operating- and

a 154,000- tonne increase in LME

stocks have all dampened sentiment,

as has the delayed arrival of the much-

anticipated supply tightness. With

Indonesian ore stockpiles in China still

around 7 million tonnes, the long-

awaited drop in NPI production is

unlikely until the second quarter of this

year. At this point LME stocks might

start to be needed to balance the

market.


Nickel

January 2015

12


becoming visible as they are moved to LME warehouses. The reason for the move is due to the difficulty traders have had in

financing the metal in China following the Qingdao fraud scandal. The presence of so much metal in warehouse - representing

some 21 percent of annual nickel consumption at current levels - should allay fears that a switch to a supply deficit will lead to

runaway prices on the upside. With a supply deficit of some 50,000 tonnes expected this year, there is plenty of cover in LME

stocks.

Demand weak on destocking – Stainless steel production was strong in China in the first half but operating rates have

since declined - the export market is not as strong as it was and the country faces some anti-dumping accusations. This, in

addition to weaker nickel prices, has led to destocking. Restocking, however, is likely to follow initially should nickel prices start

to recover, but since NPI prices climbed in China last year there was some evidence that austenitic ratios have fallen. On

balance, although slower economic growth globally might dampen stainless steel demand this year, we still feel the overall

outlook for stainless steel consumption will prove robust - it is a metal with a great demand profile and one that continues to gain

market share. Restocking cycles also have a habit of being particularly bullish for nickel prices.

Demand – Having seen prices correct sharply in the second half of 2014 and in early January, we feel the market is well

placed to start drifting higher in anticipation of firmer fundamentals later in the year. There is no shortage of nickel units so

runaway prices are not justified but because nickel has a history of volatility there is no room for complacency. We would look

for prices to trade in the $14,500-17,200 range in the first quarter.

Although nickel ore stocks at Chinese ports are still high, the gradual drawdown of Indonesian ores is what is likely to determine when NPI production in China starts to fall more sharply.

With backwardations reverting to contangos, the forwards appear to have been lent – this suggests either a pick-up in forward buying or that it may have come about because metal is being put into financing deals.

The stock overhang has dampened sentiment significantly and the high level of stocks should prevent another episode of runaway prices as was the case in the first half of 2014.

LME stocks are exceptionally high and do not appear to be held in tight hands, which should mean the stock can be used to offset several years of supply deficit.


Tin

January 2015

13


Tin – Indonesian plans thwarted by China

Overall trend – The broad sideways price oscillation in tin between $17,000 and $25,000 continues as it has since the

second half of 2011, supported by numerous Indonesian attempts to restrict supply when prices are low and capped by a pick-

up in supply from swing suppliers such as China when prices approach higher levels. At this time last year it looked as though

the latest Indonesia policy might succeed in regulating supply enough to see prices break higher but that has not been the case.

We expect prices to hold in the $18,000-$20,500 range in the first quarter.

China rocks the boat – Chinese demand for imported refined tin has dropped largely because it has increasingly

harnessed a new source of mine supply – something the tin industry had struggled to do until Myanmar started to open up in

2011. China’s imports of tin ore and low-grade concentrates from Myanmar soared 88 percent the first 11 months of 2014. This

extra supply has more than offset the restricted outflow of refined metal from Indonesia.

Indonesian exports fall – Indonesian exports totalled 75,925 tonnes in 2014, the lowest for eight years and down from

91,613 tonnes in 2013. The fact that this drop in exports has not underpinned prices is quiet surprising although it seems that

China’s ability to source tin from Myanmar has meant it has not had to tap the international market for as much metal. In turn,

this has meant there has been less demand for Indonesian tin so the market has been able to cope with the drop in Indonesian

exports. Although Indonesia exports have slowed, production has not. PT Timah mine production increased 32 percent in the

first three quarters of 2014 period and refined production climbed 16 percent but sales were up only three percent, while stocks

of tin in all forms were 18,359 tonnes – the highest in five years. This suggests Indonesia is storing up problems for itself. With

exports still flowing out from Indonesia despite low prices, it looks as though the country has lost its battle to regulate global tin

prices. Tin prices averaged $20,000 in December, which was $175 above the LME average cash price. Once again it appears

that by trying to regulate the market Indonesia has damaged it, especially for its producers.

Global supply/demand balance in refined tin (in thousands of tonnes)

2011 2012 2013 2014 (e) 2015 (f)

Production 360 335 337 352 364

Consumption 365 341 341 347 357

Balance -5 -6 -4 5 7

Price $26,000 $21,114 $22,000 $21,893 $20,500

Summary

Tin prices have fallen 23.1 percent

to $18,345 per tonne from the

peak of $23,849 late in April. The

extent of the weakness has been

surprising given Indonesia’s

attempts to regulate supply but its

efforts have been scuppered by

China’s increased use of low-

grade ores from Myanmar. From

being a net importer of tin in recent

years, China is now once again

self-sufficient, which has alleviated

the potential tightness in the world

outside China. With Chinese

production rising sharply, the

outlook for tin is not a bullish as it

was this time last year. Expect

rangebound trading.

Source: WBMS, FastMarkets forecasts


Tin

January 2015

14


Chinese tin production climbs – China has lifted refined tin production by increasing its imports of ore and

concentrates from Myanmar, which totalled 153,229 tonnes on a gross weight basis in the first 11 months of 2014, a rise of 88

percent. There would be some 26,000 tonnes of contained tin in that gross weight, the International Tin Research Institute (ITRI)

estimates. Given that the tin industry has long struggled to lift tin mine supply, this increase is significant. Chinese refined tin

production climbed 21 percent to 167,795 tonnes in January-November, the China Non-ferrous Metal Industry Association

(CNIA) reported, which is an extra 29,000 tonnes of tin supply – this more than offsets the 15,688 tonnes of supply lost from

lower Indonesian exports.

Demand outlook – Demand for tin is expected to remain steady but slower growth in China and Europe, as well the

continual process of miniaturisation in the electronics industry, could prove a headwind for solder demand because it means

less solder per item. This is countering the overall growth in the electronics industry.

Semiconductor sales remain upbeat – Sales of semiconductors (a proxy for demand for electronics/solder) climbed

10 percent in January-November from the same period in 2013, according to the World Semiconductor Trade Statistics (WSTS).

This bodes well for tin demand, albeit with the above caveat.

LME stocks rise despite the fall in Indonesian exports – LME tin stocks ended 2014 at 12,135 tonnes, up from

9,660 tonnes at the end of 2013, a rise of 26 percent. Of that LME inventory, 96 percent is in Asian warehouses and four

percent is in Rotterdam - there is none in the US. We expect the market to keep a close eye on LME stocks because the inverse

relationship between the price and stocks seems to be alive.

The surprising feature of the forward spreads is how close the forward price is to the cash prices. This suggests that, despite relatively low prices, there has been little interest in locking in forward prices.

Tin stocks oscillated between 8,065 tonnes and 13,485 tonnes in 2014. Surprisingly, the drop below 9,000 tonnes in October did not prompt much of a rally in prices, which suggests sentiment is quiet bearish.

Global semiconductor sales were climbing steadily earlier in 2014 but the rate of growth has now slowed on a month-on-month basis. This might provide a headwind for tin demand.

The fact that ICDX prices followed LME prices lower below $20,000 is a sign that the latest Indonesian system to regulate prices is not working.


Zinc

January 2015

15


Zinc – Waiting for supply tightness

Overall trend – Prices have been trading lower in a downward channel since late August, falling to a low of $2,107.50 from a

high of $2,416 last summer. Prices are still comfortably above the 2011-2013 lows that ranged between $1,718.50 and

$1,811.75 so in some ways the pullback in recent quarters appears to be a bull-flag while prices bide their time until the

fundamentals actually start to tighten. In the short term, this may mean there is room for prices to weaken further but we would

expect solid support in the $2,050-2,100 region, with resistance above $2,375 in the first half of the year.

Supply tightness on the way, but not yet – The market is focused on the likelihood that supply will tighten

considerably at the tail end of this year once the giant Century mine in Australia - with capacity of some 500,000 tonne per year

- reaches the end of its life. In the near term, with spot treatment charges rising in 2014, there does not appear to be a shortage

of mine output - a host of small or medium-sized increases are cumulatively likely to lead to a meaningful increase that should

raise mine output by around 500,000 tonnes this year. The International Lead and Zinc Study Group (ILZSG) forecasts a

470,000-tonne increase in mine output and a 430,000-tonne increase in refined output so the loss of 500,000 tonnes from

Century - as well as losses from smaller operations - will be felt most in 2016 rather than this year.

Stronger demand for galvanised steel in China – The latest ILZSG data shows a supply deficit of 277,000 tonnes

in the January-October period compared with a 53,000-tonne deficit in the equivalent 2013 period. Refined supply climbed 3.8

percent or some 406,000 tonnes while usage was 630,000 tonnes higher, with a 548,000-tonne increase in Chinese demand

accounting for the increase. Although the Chinese property market has slowed, demand for galvanised steel is rising strongly,

with output up 15 percent in the first 10 months of 2014. With the government recently fast-tracking $1 trillion of infrastructure

projects, demand for galvanised steel and other metals is likely to remain well supported.

Global supply/demand balance in refined Zinc (in thousands of tonnes)

2011 2012 2013 2014 (e) 2015 (f)

Production 13,080 12,593 12,900 13,500 14,000

Consumption 12,706 12,342 12,890 13,600 14,150

Balance +374 +251 +10 -100 -150

Price $2,191 $1,948 $1,915 $2,165 $2,300

Summary

Since the double top over the summer

months, zinc prices have gradually

retreated. Given the run up in prices to

$2,416 per tonne in July last year and

the fact that supply is not expected to

tighten until the second half of 2015, it

is fair to say prices ran ahead of the

fundamentals. With the global

economic outlook deteriorating in the

second half of 2014, the correction in

zinc has continued but before too long

the market will no doubt focus on the

supply deficit again - the rate of

declines in LME stocks might well

determine when the market turns

bullish again. We would expect it to

start later in the first quarter.

Source: ILZSG, FastMarkets forecasts


Zinc

January 2015

16


Auto sales growth slows in China and Europe – Zinc has three main uses in the auto industry: galvanised steel is

used to make car bodies and panels, die-cast alloys are used to make parts and zinc oxides are used to vulcanise the rubber in

car tires - the transport industry accounts for around a quarter of zinc consumption. While the US auto industry continues to

grow strongly - sales rose 5.9 percent in 2014 - there are worrying signs about slower growth in Europe and China. In

November, auto sales in Europe were up just 1.4 percent on October and although year-to-November sales were up 5.7 percent

compared with the same period in 2013, recent data may highlight a slowdown. The same is true in China where sales were up

3.9 percent in November compared with October after growth rates of 11.2 percent in the first half of the year. A slowdown in

these regions could be another factor that offsets slower supply growth.

LME stocks fall but it's probably just metal being relocated – LME zinc stocks peaked in December 2012 at

1.235 million tonnes and were last at 680,850 tonnes, off 44 percent from the peak. It is unclear how much has actually left

warehouses to be consumed and how much has merely been relocated to off-warrant financing deals or shipped to China to act

as collateral. ILZSG data shows the market was in a supply surplus between 2009 and 2012 and our data shows the market

was balanced in 2013 and is likely to be in a 100,000-tonne deficit in 2014, which suggests that a good deal of the stock

drawdown in recent years has not been consumed. This could help cushion the impact of supply deficits in the years ahead

although those holding stocks are likely to release it only if prices, premiums or spreads justify it.

The forward spreads shows that the price weakness is now seeing the spreads lent, which suggests forward buying. Note that 3-15 months is trading above further forward months, supporting the likelihood of tightness in 2016,

Although LME stocks are trending lower, there have been odd bouts of large increases. This tends to suggest there is metal sitting off-warrant that can be put on warrant when backwardations allow.

Cancelled warrants are climbing again after dipping to a low of 84,575 tonnes in mid-December. The widening contangos may indicate increased demand to put metal into financing deals again.

Physical premiums for metal in warehouse reflect regional availability and demand. Premiums have changed little in recent months - the bulk of stocks remain in the US at 93 percent. Stock falls have been seen in all regions, with the bulk - 65,100 tonnes - in the US since September.


Steel & Iron Ore

January 2015

17


Steel & Iron Ore - Oversupplied

Overall trend – Iron ore prices had a torrid time in 2014 in what appeared a race to the bottom by the major producers looking

to sell production from their capacity expansions. Since their aim seems to be to gain market share from domestic Chinese

producers and other smaller seaborne suppliers, it is unlikely that iron ore prices will enjoy much on the upside other than during

short-lived bouts of short-covering in the face of seasonal weather-related supply disruptions, which are normal at this time of

year. To force higher-cost of producers out of the market suggest prices will have to stay down for a considerable period. Steel

prices are also likely to trend lower as input costs fall and domestic producers face competition from imports.

Iron ore – Prices shot above $180 per tonne in 2011 from around $36 in 2007 on the combination of 1) rampant demand from

China after the massive stimulus injections during the financial crisis; 2) disruptions to supply from India’s banning of some

exports; and 3) delays to bringing on Brazilian new capacity. While this provided a huge incentive for Australian producers to

ramp up capacity, the timing of the increase has coincided with slower global growth, especially in China. Having invested

heavily in new production, the iron ore majors have little option than to strike out to gain market share, which they are now

doing. The result is that iron ore has moved into a significant supply surplus; since the latest capacity additions are low-cost,

prices plunged to a low of $66.84 in December. Even with marginal costs for Chinese domestic producers falling because of the

drop in oil prices, energy costs are around 35 percent of costs of production for iron ore. This has forced many Chinese

producers to cut output because they are still at the high end of the cost curve; more cuts are likely, although other seaborne

suppliers are being forced out of the market too. Until balance is restored, iron ore prices are likely to remain depressed around

$70 but are likely to rebound later in the year as more strategic buying is carried out, mainly by China. Expect a range of $67-

$73 in the first quarter.

Chinese iron ore required to balance the market (in millions of tonnes)

2013 2014 (e) 2015 (f)

Chinese demand 1138 1180 1194

Ex-China seaborne demand 422 430 451

Total demand 1560 1610 1645

Seaborne supply 1196 1343 1470

Demand for Chinese domestic iron ore 364 267 175

Source: FastMarkets

Summary

With iron ore prices slipping back below

$70 per tonne in mid-January after a

New Year rally fizzled out, it looks as

though prices will struggle on the

upside. What's more, it seems the main

producers also want this outcome while

they try to gain market share by forcing

higher-cost producers out of the market.

Cheaper oil prices will further lower

shipping costs for the seaborne market,

helping them in that respect. With

steelmakers' input costs (iron ore and

energy) falling, it is difficult to see

anything other than a well-supplied steel

market, with producers looking to boost

revenues by raising exports – all of

which is likely to weigh on prices.


Steel & Iron Ore

January 2015

18


Steel industry faces pricing pressure – With lower iron ore and oil prices, steelmakers are under pressure from

customers to cut prices, especially while other countries try to muscle in. Russia and China have been particularly active in the

export market - the former has benefitted from the slump in the rouble and the latter has the advantage of being the recipient of

cheap iron ore. As producers push their export potential, more anti-dumping duties are being applied, especially to Russia.

HRC prices slide – US HRC reference prices fell to $668 per tonne in December from around $723 in late September; the

spread with Chinese export material is holding around $220. In northern Europe, HRC reference prices are also falling, reaching

five-year lows around €404 per tonne in December, down from around €423 late in September. Chinese export reference prices

to Asia were around $445 per tonne in late December, down from $481 in late September. In Europe, imports gathered pace in

2014, with flat steel imports up 17.6 percent in the first ten months on the same period in 2014, while production increased 2.7

percent over the first 11 months.

China and Russia look to the export market – With domestic demand weak in China, producers have looked to the

export market - exports rose 47 percent to 83.62 million tonnes in January-November from a year earlier. Given regional price

differences, this is not surprising and is only likely to be slowed by anti-dumping duties. Russia likewise has stepped up exports

as its competitiveness has increased thanks to the drop in the rouble.

Supply outweighs demand – Given the market set-up, with oversupply in iron ore and oil, steel prices seem likely to remain

under downward pressure, while iron ore prices, having already fallen significantly, are likely to remain in the low ground.

HRC steel prices in North America have managed to hold above prices in other regions, helped by good domestic demand, but the higher price is attracting imports. Overall, oversupply and cheaper raw material costs are keeping downward pressure on prices globally.

Steel prices are facing perfect combination of events that has boosted competition among regional producers, with some benefitting from lower iron ore prices, others from currency weakness and all from lower energy prices.

The forward curve for iron ore swaps is sloping downward, suggesting the market expects the supply surplus to weigh on prices while excess, higher-cost capacity is gradually closed.

Global steel output in the first 11 months of the year was up 3.1 percent on the same period of 2013. Even with steel prices falling, output is still rising, with growth seen each month so far this year compared with the same month of last year.


Gold

January 2015

19


Gold – Forming a base as selling abates

Overall trend – Gold extended to a four-and-a-half year low of $1,131.60 per ounce early in November after breaking key

double-bottom chart support at $1,180. The metal is working higher early in 2015, having put a base in place, but there is

notable overhead resistance. Meanwhile, forward rates tightened again in November when price weakness drew strong demand

from the physical community. In the first quarter we are looking for a range between $1,170 and $1,280.

Fund activity - Net length among Comex speculators proved somewhat mixed over final quarter of the year. Gross longs

reached their highest since March 2013 when gold tested above $1,250 on October 21. Open long exposure would hold around

180,800 contracts during the rest of the period, with short exposure again driving net flows. After an initial bout of short-covering

late in October, gross short exposure increased to some 121,225 contracts when speculators sold into the November low of

$1,131.60. The NLFP increased to 115,837 contracts by the end of December after speculators reduced their short exposure in

late November and early December.

ETF investment activity – ETF investment exposure remained on a downwards bias across the quarter, led primarily by

liquidation from the US-listed SPDR fund while institutional investors sought higher-yielding assets. Net holdings in the funds we

monitor ended December at 1,606 tonnes, falling 152 tonnes across 2014 to their lowest since March 2009. Still, we feel the

price pressure this poses will be lower in 2015, with deflationary pressures potentially drawing in new demand.

Physical demand – Anecdotal evidence suggests physical demand was strong during the fourth quarter, reflecting

seasonal demand - Diwali fell on October 23 and the Golden Week holiday in China was in early October. Christmas-related

stocking by manufacturers in Turkey was also notable. Demand was further bolstered by the relaxing of import policy by the

Global supply/demand balance gold (tonnes)

2011 2012 2013 2014 (e) 2015 (f)

Supply 3994.0 4454.9 4254.0 4200 4100

Demand 4067.1 4594.7 4080.0 4300 4350

Stock flow -73.1 -139.8 174.0 -100 -250

Price $/oz 1,572 1,669 1,411 1,266 1,200

Source: FastMarkets, WGC, Thomson Reuters GFMS

Summary

Gold remained under pressure in the

final quarter of 2014 on dollar strength

and growing demand for higher-

yielding risk assets. Technical selling

was also a feature after gold breached

double bottom chart support around

$1,180. The price weakness

stimulated physical demand as gold

entered its seasonal peak demand

period. Demand is expected to remain

strong early this year while Chinese

demand is boosted by New Year-

related purchases. Further asset

diversification among emerging market

central banks has also been evident,

absorbing continued liquidation from

western institutional investors, also a

trend we expect to continue in 2015.


Gold

January 2015

20


Indian government, which surprisingly dropped the rule requiring 20 percent of gold imports into the country to be re-exported.

Strong demand is expected in the first quarter of 2015 given several auspicious dates on the Hindu calendar as well as Chinese

New Year on February 19.

Central banks – Central banks remain net buyers of gold in 2014, a trend we expect to continue. Net holdings increased

223 tonnes in the first 10 months of last year, according to the latest figures from the WGC, primarily as emerging markets

diversified their reserve portfolios. Speculation of possible sales by Russia - its holdings increased 134 tonne last year -

emerged during the fourth quarter while the central bank sought to stem the rapid depreciation of the rouble. We feel the threat

to gold holdings is minimal, with recent volatility potentially prompting further diversification into gold by the central bank.

The historical inverse correlation between gold and the dollar was re-established across the second half of 2014. Stronger economic activity in the US and the prospect of higher interest rates pose a threat to gold in 2015, although we feel the correlation will weaken amid physical demand and diversification.

Demand from the physical sector surged in the latter part of 2014, reflecting seasonal demand as well as the relaxation of import policy in India. Seasonal buying will continue to feature in the first quarter of this year, although we feel the surge in imports reflect an element of wholesale stockpiling.

Gold ETF holdings trended lower while investors continued to seek higher-yielding assets. ETFs will remain a supply source in 2015, we feel, albeit at more modest levels, while deflationary pressures may draw some fresh demand from Europe.

Open long exposure among Comex speculators remained stable again, with the price weakness below $1,200 failing to shake their confidence. Price fluctuations were again led by short positioning, which stands at the mid-point of its recent range.


Silver

January 2015

21


Silver – Stabilising at lower levels

Overall trend – Silver attempted to establish a base around $17 per ounce at the start of the fourth quarter before

succumbing to further price pressure amid dollar strength and falling oil prices. The metal reached a five-year low of $14.65 on

December 1st before stabilising at $15.50-16.50 over the rest of the month, supported by steady investment demand and

speculative short covering. Average prices should be nearer $17.50 in 2015 from around $19.08 last year, with rallies to be

capped by producer hedging, particularly given the price weakness in co/by-products such as copper and lead. We expect

investment and industrial related demand to continue to provide strong underlying demand.

Net ETF exposure to silver remained stable across 2014 as a whole. Retail investment demand appeared strong as well, with Eagle coin sales by the US Mint reaching a record 1,366 tonnes.

Having been quite polarised across October and into November, the NLFP finished the quarter some 4.5 times higher amid a reduction in open shorts. Short exposure will continue to drive short-term price sentiment.

Global supply/demand balance in refined silver (in tonnes)

2011 2012 2013 2014 (e) 2015 (f)

Supply 32,291 31,303 31,166 32,065 31,850

Demand 32,926 33,396 33,822 31,875 32,455

Balance -635 -2,093 -2,656 190 -605

Price $/oz 35.12 31.15 23.79 19.08 17.50

Source: FastMarkets, Thomson Reuters GFMS

Summary

Price weakness continued into the final

quarter of 2014 as dollar strength and

weak oil prices triggered selling

pressure across the metals spectrum.

Silver hit a five-year low under $15 on

December 1st although this prompted

speculative short covering; prices

subsequently stabilised. Retail

investment demand would continue to

feature, as reflected by record Eagle

coin sales by the US Mint. Demand in

Asia remains strong with India reporting

record imports. These trends will

continue in 2015 although we feel

rallies will struggle amid producer

related selling.


PGMs

January 2015

22


PGMs – Fundamental tightness to persist

Overall trend – Platinum closed the fourth quarter 7.2 percent lower, reflecting lacklustre investment interest from European

and US ETF investors and muted Chinese jewellery demand. Palladium found strong support from South African investors when

prices were below $750 per ounce and set about establishing a base around $800 by the end of December, closing the year

with a solid 11.2-percent gain. We feel platinum will trade in a $1,150-1,450 range in 2015 and palladium in a firmer $750-920

range.

Supply shortfall – Both platinum and palladium recorded substantial deficits of more than 1 million ounces in 2014 due to

supply-side issues. We expect stronger supply this year thanks to higher mine output and further growth in autocatalyst

recycling but we feel the supply side will remain vulnerable to disruptions. A review of operation by Amplats and Implats could

see some high-cost mine operations in South African shuttered, while we maintain our view Russian state palladium stocks are

near depletion given the slow pace of exports, as the chart below indicates. As a whole, we feel both metals will remain in

structural deficits in 2015, continuing to draw on above-ground stock, albeit at more modest levels than in 2014.

Platinum holdings levelled off across the fourth quarter as fresh demand from South Africa negated liquidation from Europe and the US. South African demand for palladium remains strong, albeit more price sensitive.

The continued expansion in the global vehicle fleet will continue to fuel demand for PGMs, particularly as tighter emission controls prompt higher metal loadings. But we feel palladium will benefit more relative to platinum given falling sales of diesel-powered cars despite lower fuel prices

Summary

The 2014 trends will persist - palladium is set to further outperform platinum in 2015. Increasing growth in global vehicle

sales and renewed ETF investment demand will continue to fuel demand while dollar strength and wider commodity price

weakness will act as price drags. Supply disruptions could again feature.

Platinum Palladium


Appendices

January 2015

23


Appendices

Aluminium appendix

Global Aluminium Production (Source: IAI)

PERIOD AFRICAASIA (EX

CHINA)GCC CHINA

CHINA

ESTIMATE

D UN-

REPORTED

NORTH

AMERICA

SOUTH

AMERICA

WEST

EUROPE

EAST &

CENTRAL

EUROPE

OCEANIA

ROW EST.

UN-

REPORTED

TOTALDAILY

AVERAGEChina RoW

NOV 2014 139 222 414 2128 300 375 111 295 312 165 90 4551 151.7 2428 2123

OCT 2014 144 204 426 2084 300 379 115 300 321 165 90 4528 146.1 2384 2144

SEPT 2014 142 194 414 2041 300 372 111 291 310 160 90 4425 147.5 2341 2084

AUG 2014 148 198 426 2027 300 386 117 299 319 165 90 4475 144.4 2327 2148

JUL 2014 144 203 427 1977 300 386 117 299 319 175 90 4437 143.1 2277 2160

JUN 2014 143 193 412 1954 300 372 117 290 309 174 90 4354 145.1 2254 2100

MAY 2014 152 203 418 1898 300 392 135 297 319 178 90 4382 141.4 2198 2184

APR 2014 147 195 393 1895 250 380 140 283 309 173 90 4169 141.8 2145 2024

MAR 2014 151 201 387 1984 250 399 152 295 319 177 90 4,330 142.1 2234 2096

FEB 2014 138 182 331 1833 250 361 139 269 287 159 90 3964 144.3 2083 1881

JAN 2014 156 202 352 1938 250 398 157 289 318 176 90 4,251 139.5 2188 2063

DEC 2013 156 206 336 1932 250 399 155 296 316 180 90 4241 139.2 2182 2059

NOV 2013 150 194 310 1954 250 388 151 294 308 175 90 4189 142.1 2204 1985

OCT 2013 156 202 326 1951 250 401 156 302 316 180 90 4255 139.7 2201 2054

SEPT 2013 150 196 326 1858 250 394 152 293 314 174 90 4122 139.9 2108 2014

AUG 2013 156 200 334 1863 250 416 161 303 333 179 90 4210 138.2 2113 2097

JUL 2013 157 200 334 1839 250 425 161 302 342 178 90 4203 138.0 2089 2114

JUN 2013 151 197 327 1843 250 413 152 291 335 175 90 4149 140.8 2093 2056

MAY 2013 153 208 334 1766 250 428 164 298 350 176 90 4142 136.0 2016 2126

APR 2013 145 207 320 1707 250 416 162 290 341 171 90 4024 136.6 1957 2067

MAR 2013 147 217 328 1734 250 428 169 298 357 178 90 4121 135.4 1984 2137

FEB 2013 138 196 293 1729 250 385 154 266 323 161 90 3910 142.3 1979 1931

JAN 2013 152 216 319 1760 250 425 168 292 360 179 90 4136 135.8 2010 2126

China’s trade in primary aluminium is

minimal but exports of semis are a

potential threat to markets outside

China.

Chinese imports have fallen because

higher local prices have encouraged

domestic smelters to raise output.

Exports are not showing the full picture

because exporters export non-primary

aluminium to avoid paying export taxes.

IAI production data shows global output

climbed sharply in November but it has

been trending higher since May last

year.


Appendix

January 2015

24


Copper appendix

Copper start-ups and expansions (excluding China)

Mine Owner Country 2015 Notes

Morenci Freeport-McMoRan USA 184,000

Sentinel First Quantum Zambia 190,000 Capacity 270,000-300,000

Caserones Pan Pacific Copper Chile 91,000 Ramping-up

Toromocho Chinalco Peru 100,000 Output target lowered from 124,000

Sierra Gorda KGHM Chile 90,000 Start-up was delayed

Source: FastMarkets

Global copper production and consumption (thousands of tonnes)

2010 2011 2012 2013 2013

Jan-Sep 2014

Jan-Sep 2015 f

Mine production 16,038 16,052 16,688 18,106 13,292 13,0627 19,816

Refined production 18,985 19,596 20,147 20,059 15,520 16,815 23,086

Refined capacity utilisation 80.4 81.3 80.1 79.5 78.1 81.1

Consumption 19,138 19,705 20,403 21,327 15,653 17,394 22,692

Refined balance -153 -109 -256 -267 -133 -578 393

Period stock change -178 7 171 -51 -119 -111

Refined stocks (end period) 1,198 1,205 1,376 1,325 1,495 1,213

Source: ICSG (forecast from Oct 2014)


Appendix

January 2015

25


Lead appendix

World refined lead supply and usage 2010-2014 (in thousands of tonnes)

2010 2011 2012 2013

2013 2014 2014

Jan-Oct Jul Aug Sep Oct

Mine production 4,168 4,644 5,035 5,435 4463 4350 474.5 445.8 483.9 396.3

Metal production 9,850 10,606 10,550 11,122 9149 9310 987.8 989.5 1002.1 862.9

Usage 9,812 10,444 10,483 11,120 9178 9295 973.8 978.9 1012.1 843.3

Balance 38 162 67 2 -29 15 14 10.6 -10 19.6

Source: ILZSG, FastMarkets


Appendix

January 2015

26


Nickel appendix

In the aftermath of the Qingdao Port scandal, off-market refined nickel stockpiles have been exported to the LME where financing has been easier.


Appendix

January 2015

27


Tin appendix

Tin Prices ICDX & LME

ICDX LME Cash

02-Jan-14 23,125 22,060

03-Feb-14 22,900 22,163

03-Mar-14 23,495 22,995

01-Apr-14 23,050 22,970

02-May-14 23,025 23,138

02-Jun-14 23,665 23,388

02-Jul-14 23,025 23,023

01-Aug-14 22,700 22,811

01-Sep-14 22,220 21,817

01-Oct-14 21,575 20,311

03-Nov-14 19,995 19,578

01-Dec-14 21,000 20,317

02-Jan-15 19,320 19,434

Source: LME, ICDX

Top 10 Refined Tin Producers (tonnes) 2012 2013 Change

Yunnan Tin (China) 69,760 70,383 1%

MSC (Malaysia) 37,792 32,668 -14%

Minsur (Peru) 24,822 24,397 -2%

PT Timah (Indonesia) 29,512 23,718 -20%

Thaisarco (Thailand) 22,847 22,986 1%

Yunnan Chengfeng (China) 16,600 18,300 10%

Guangxi China Tin 14,034 11,870 -15%

EM Vinto (Bolivia) 11,241 11,253 0%

Metallo Chimique (Belgium) 11,350 10,344 -9%

Gejiu Zi-Li (China) 7,000 6,000 -14%

Source: ITRI


Appendix

January 2015

28


Zinc appendix

World refined zinc supply and usage 2009-2014 (in thousands of tonnes)

2009 2010 2011 2012 2013 2013 2014 2014

Jan-Oct Jul Aug Sep Oct

Mine Production

11605 12346 12590 12770 13191 10882 11090 1172.3 1175.0 1107.7 1151.9

Metal Production

11271 12896 13064 12630 12873 10684 11090 1136.1 1124.3 1150.4 1171.2

Metal Usage

10905 12649 12699 12386 12970 10737 11367 1157.6 1164.0 1165.6 1132.7

Balance 366 247 365 244 -97 53 -277 -21.5 -39.7 -15.2 38.5

Source : ILZSG

Zinc imports have been high in the year to date but have been falling in more recent months. Also of note is that exports have picked up since July, which suggests metal has been relocated following the Qingdao Port fraud scandal.

The fall in zinc stocks on the LME means stocks as a percentage of annual consumption have started to fall, which is a step in the right direction – that is if the metal has been consumed and is not just being held off warrant, which may well be the case.

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quarterly metals report january 2015

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