sucden financial quarterly report april 2015

Quarterly Metals Report April 2015 Analysis & forecasts for Base &

Precious Metals, Iron Ore & Steel

Contents

Market Overview 2

Aluminium 6

Copper 8

Lead 10

Nickel 12

Tin 14

Zinc 16

Steel & Iron Ore 18

Gold 20

Silver 22

PGMs 23

Appendices 24

Disclaimer 32

Compiled and Published by Sucden Financial Limited on 14 April 2015

Metals Comments/Analysis:

William Adams, Head of Research, FastMarkets.com

Steve Hardcastle, Head of Client Services, Sucden Financial Limited

www.sucdenfinancial.com/metals

Sucden Financial Limited is authorised and regulated by the

Financial Conduct Authority.

MARKETING COMMUNICATION

Quarterly Metals Report

Summary

April 2015

Sucden Financial Limited is authorised and regulated by the Financial Conduct Authority.

The information in this report is provided solely for informational purposes and should not be regarded as a recommendation to buy, sell or otherwise deal in any particular investment. Furthermore, the information in this report has not been prepared in accordance with legal requirements designed to promote the independence of investment research. All information in this report is obtained from sources believed to be reliable and we make no representation as to its completeness or accuracy. This report is not subject to any prohibition on dealing ahead of the dissemination of investment research. Accordingly the information may have been acted upon by us for our own purposes and has not been procured for the exclusive benefit of customers. Sucden Financial believes that the information contained within this report is already in the public domain. Private customers should not invest in these products unless they are satisfied that the products are suitable for them and they have sought professional advice.

Marketing Communication

Summary

Aluminium The contrived tightness in aluminium is showing signs of floundering as premiums are falling and availability has increased. Expected range for the next quarter of $1,720-1,850.

Copper Subdued global demand growth and supply surpluses are expected this year and next, with a weaker Chinese economy and struggling economic growth in Europe and Japan. Expected range for Q2 2015 of $5,900-6,450.

Lead The lead market is considered to be fairly well balanced. The leap in cancelled warrants in mid-March is likely to lead to considerable tightness in nearby LME dates. For the second quarter, a range of $1,800-2,050 is expected with possible spikes to $2,150.

Nickel The Indonesian story has dramatically changed the fundamental outlook. The recent sharp sell-off in nickel prices seems to be largely overdone, so a range of $12,000-15,000 is anticipated for Q2 2015.

Tin The key element for tin has been the export of tin ores and concentrates from Myanmar which enabled China to revert back to being a net tin exporter in 2014 for the first time in seven years. Range for Q2 2015 expected to be $16,500-19,000.

Zinc Given the recent dollar strength and tighter zinc fundamentals, we would expect good underlying buying at $2,000-2,050 with resistance above $2,340.

Iron Ore and Steel Iron ore supply surged due to new production being ramped up in Australia. Both iron ore and steel prices are likely to remain under pressure until more production cuts are made. Iron ore prices are likely to trade either side of $55 in the second quarter.

Gold

Seasonally strong physical demand provides support. However, while this demand fades, gold will be increasingly

vulnerable to downside pressure. Range of $1,170-1,250.

Silver

Jewellery and investment-related demand will continue to provide underlying strength. Still, silver continues to face

mounting pressure as rallies encounter strong selling. Range of $16-18.50.

PGMs Solid growth in auto sales continues to support PGM prices. Given the recent weakness and the persistent US dollar strength, platinum is expected to average $1,100-1,250 and palladium around $750-850 in the second quarter of 2015.


Market Overview

April 2015

2


Market Overview

Outlook improving while stimulus provides support – Weak demand has remained the main story in the markets this

year despite the belief that the world's major economies had pulled out of recession and achieved renewed economic

momentum at the start of the year. Although the US seemed have reached escape velocity after the end of its third quantitative

easing (QE) programme, it became a victim of its own

success, ultimately hindered by its strengthening dollar in

a race to the bottom across currencies. And it was hoped

that while China’s numerous stimulus measures were

enough to kick-start growth, inherent economic

weakness became apparent, prompting a lowering of its

2015 GDP growth target after the slowest expansion in

24 years in 2014. In Europe, ECB president Mario

Draghi’s ‘whatever it takes’ stance had already started to

wear thin, with a full-blown QE programme already

believed to be on the cards. But the extent of the risk that

Greece would pose to this recovery was unforeseen.

With conflicting data of late, market volatility depends on

how three questions are answered.

Will Beijing stimulate its economy further with another liquidity injection? Despite the government bringing

forward 300 infrastructure projects with a value of $1 trillion to this year to spur economic activity, the Chinese economy has

continued to falter, exacerbated by global weakness. This was confirmed by the reduction in the growth rate target to ‘around

seven percent’ from 7.5 percent in 2014 – China failed to hit its target in 2014, the first such failure since 1998. Although

Chinese economic weakness would normally be bearish for base metals, Chinese Premier Li’s assertions that Beijing would

look to prop up the economy should GDP growth move towards the lower end of its 2015 forecast range has changed the status

quo by making negative data also positive for base metals via the increased potential for consumption-driving stimulus. This has

been bolstered by the IMF’s cut to its 2015 growth forecast to 6.8 percent from 7.1 percent. Still, earlier concerns about China’s

slowdown have weighed on prices in the first quarter. The two manufacturing PMIs continue to diverge, with the official number

rising to 50.1 and the HSBC reading falling to 49.6 in

March, clouding the true state of the sector. The return

of the official PMI, which covers many large and often

state-owned companies/factories, to expansion for the

first time this year suggested a boost to demand. But the

HSBC PMI, which focuses more on small-and-medium-

size enterprises (SMEs), failed to maintain its return to

expansion. This indicates that the smaller players

remain under pressure from reduced demand and tight

credit. This is likely to maintain speculation for further

stimulus from Beijing to keep growth above seven

percent – further stimulus could therefore halt the

downward trends in base metal prices.

Can the ECB reinvigorate growth and reverse the eurozone's deflationary spiral? The ECB has finally launched

its highly anticipated QE programme to spur spending and drive inflation towards its mandated two-percent target. The ECB will


Market Overview

April 2015

3


purchase €60 billion per month of public and private sector assets provisionally until September 2016, giving a total programme

size of around €1.2 trillion. With the ECB needing to buy around €850 billion of government bonds to reach its balance sheet

target, from where will it buy? Only investment funds and non-Eurozone entities are likely to be willing to sell but this may be

seen as a less effective way of spurring European economic spending, although a knock-on effect would likely still be felt. QE, in

addition to the previous three targeted long-term refinancing operations (TLTROs), appears to have succeeded in stoking

inflation and reversing the deflationary slide, with the rate of deflation having fallen month-on-month since January. The CPI is

currently forecast at -0.1 percent in March, which would be the highest level since November. If confirmed and the present rate

is sustained, the eurozone would be on track to return to inflation this month. But with record OPEC output, low oil prices (driven

by a flooded spot market due to a lack of

available storage) could stymie inflation. Despite

a reduction in the ECB’s inflation forecast for

2015 to 0.0 percent from 0.7 percent, it raised

its forecast for 2015 growth to 1.5 percent from

1.3 percent. A return to inflation should

therefore bolster growth in the bloc, increasing

its global competiveness via further euro

weakness – the single currency has already

fallen close to parity with the dollar. A revival in

European economic growth could provide

considerable confidence to global industry and

via that to base metals via restocking.

When will the US Federal Reserve look

to raise rates? Markets had been expecting the FOMC to raise rates either in June or September, driving the dollar index to

around 100 and putting commodity prices under downside pressure. But the replacement of the word ‘patient’ in the FOMC

minutes with ‘reasonably confident’ and assurances by chair Janet Yellen that rate rises remain data-dependant shifted

speculation away from June towards September. In addition, recent data, including the fall in fourth-quarter GDP growth to 2.2

percent from five percent in the third quarter and March’s weak employment report, suggest the Fed may delay the first rate r ise.

This change in its stance triggered a downside correction in the dollar – it seems that dollar strength may have run ahead of the

fundamentals. The pullback in the greenback has

triggered short-covering and some bargain hunting

ahead of the second quarter. We expect this will

mean increased price volatility off of US data. The

manufacturing sector, which had been slowing

since the end of QE, hinted at a return to rising

growth in February when the official manufacturing

PMI signalled its first increase in the rate of growth

since August. US official (55.7) and ISM (51.5)

PMI data for March continue to diverge, painting

two very different pictures of the US

manufacturing sector. The ISM PMI, which has

been signalling falling growth since October –

when the Federal Reserve ended QE3 – indicates falling economic momentum while the US exports the strong domestic

demand that initially enabled it to achieve escape velocity and effectively imports deflation, implying that the strong US dollar

has become a hindrance to growth. But the improvement in the official number – it has been rising since January – signals that


Market Overview

April 2015

4


the manufacturing sector may have bottomed out and is now picking up momentum after reaching a more normalised level after

the removal of QE-driven liquidity. We expect this sustained divergence to continue to give the Fed an excuse to delay making

its first move on interest rates. With low oil prices and an economy that continues to look to be faltering, we do not expect the

FOMC to act until there is confirmation of sustained strength in the manufacturing, employment and housing sectors, most

probably pushing out a rate rise to September.

Geopolitical risks – The threat of a Greek exit from the eurozone and tensions over Ukraine and in the Middle East, which

have picked up with Saudi Arabia’s involvement in Yemen, could create dark economic clouds and could hit market confidence

hard. But fears of the euro breaking up since the onset of the financial crisis have come and gone; although there is no room for

complacency, policymakers have shown their ability to reach last-minute deals even if they merely ‘kick the can’ down the road.

At some stage they may run out of road but it is difficult to anticipate when that will be – it is likely to be triggered by a ‘black-

swan’ event. As for the Middle East and Ukraine, the markets are now probably less vulnerable given low energy prices – again,

although a deterioration could affect the markets, it is difficult to anticipate what will happen and therefore difficult to forecast an

impact on prices. With the Ukraine conflict weakening Eastern European currencies, these countries might have been

encouraged to export more metal, which may well have been reflected in weak aluminium, nickel, steel and palladium prices –

while currency weakness may well have given producers an incentive to boost output, it may also have prompted destocking.

Any step towards a solution to the Ukraine conflict could reverse these trends or at least halt them.

Oil’s multi-edged sword – The weak oil price continues to weigh on central bank actions to drive inflation higher and low

inflation is not incentivising corporates to increase capital spending. Weak oil/energy prices have also increased producers’

profit margins, thereby encouraging higher output, which has had bearish implications for metal prices. But low oil prices will be

benefitting the global economy in other ways – cheaper motoring, energy and heating should all boost households’ disposable

income and lead to increased household/consumer spending, which in turn should underpin stronger manufacturing. But the

lower metals prices are now starting to prompt more producer restraint, especially in steel, iron ore, nickel and aluminium.

Dollar’s direction all-important – The dollar

has been racing higher since July last year in

anticipation of diverging monetary policies. So far

US policy has tightened in that QE has finished and

a host of other central banks have been easing but

the dollar has also anticipated firmer US interest

rates, which so far have not eventuated. The recent

pullback in the dollar index may well just be a long

overdue bout of consolidation but there is a risk

that, if the Fed is seen as having cold feet about

raising rates, the dollar has run ahead of the

fundamentals. With the world’s economy outside of

the US suffering, the US may find one excuse after

another to delay raising rates – if so, a dollar

correction could well prompt a bullish adjustment in

metals prices, especially in bullion.

Overall – The slowdown in Chinese growth has been one of the main bearish features weighing on sentiment; low growth in

Europe has not helped either. The market also seems concerned and/or shocked by how much metal has come out of the

woodwork in the likes of nickel and copper and whether we are moving into an era when financing metal may be less profitable,

resulting in more metal from off-market stockpiles finding its way back to the market. The much-discussed shortages in zinc and


Market Overview

April 2015

5


nickel and aluminium's move into a deficit do not seem to be underpinning prices, which has undermined confidence. Still, it now

looks as if the markets stand a better chance of not being already long when the shortages arrive. This could lead to a sustained

bull market from later this year but much will depend on how tightly off market stocks are held.


Aluminium

April 2015

6


Aluminium – Chinese exports tip the balance

Overall trend – Aluminium’s downward trend after the August 2014 peak at $2,119 has continued, with prices falling to a

low of $1,745 in March. While LME prices have generally been under pressure, physical premiums had been rising in all regions

throughout most of 2014 (and into 2015 in the US) but have now turned lower. Lower premiums and low LME prices are hitting

producers’ margins hard. Some non-dollar producers had some respite in the stronger greenback but even that is now receding

while the currency weakens. Premiums are under pressure - surplus production is seeping out of China and the tighter nearby

spreads have made it harder to keep metal financed, which has led to more metal returning to market. Given how much metal is

believed to be held off market, there could be significant downside pressure on prices and premiums if financing becomes more

difficult.

Production continues to climb as oil price lowers costs of production – Global aluminium output in

February averaged 160,900 tonnes per day (tpd) compared with 149,500 tpd during the fourth quarter and 144,300 tpd in

February 2014, according to the International Aluminium Institute (IAI). So global output in February was running six million

tonnes higher than a year earlier on an annualised basis. Ever-increasing output, high total stocks and a low global GDP

environment do not bode well for aluminium. It seems that either prices will fall to force further supply restraint or that producers

will have to be active in cutting output before prices force them to. On a February-to-February basis, China’s output was up 20

percent, Asia ex-China was also up 20 percent and Middle East output was up 18 percent. South American output was down 27

percent, African output was off seven percent and North America output was down three percent. With production in the first two

months running some 15 percent above the same period in 2014 and with demand unlikely to match that growth rate,

production cuts/restraint are needed; when taking the stock overhang into account, it looks as though prices will be vulnerable to

further weakness.

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 56.8

Consumption 42.8 47.4 50.4 53.6 56.8

Balance +1.9 +0.4 +0.4 +0.2 0

Price $2,400 $2,000 $1,860 $1,900 $1,850

Summary

Aluminium tried to rally at the start of

2015 but stalled, with prices falling

below $1,800 per tonne again, but it

found support at $1,745. The

contrived tightness in aluminium is

showing signs of floundering -

premiums are falling and availability

has increased. Tighter spreads on the

LME have made it harder to roll over

expiring financing deals, which has

boosted availability. Currency

weakness, weak domestic demand in

the likes of Russia and over-

production in China have also

bolstered these countries’ efforts to

export metal, which in turn has

weighed on premiums and sentiment.

There is little to be bullish about

unless production cuts are made.

Source IAI, WBMS, FastMarkets forecasts


Aluminium

April 2015

7


Chinese exports: the straw that broke the camel’s back – Exports of aluminium semis from China in the first

two months of the year totalled 770,000 tonnes, which was up 91 percent from the same period in 2014. Higher exports will

have displaced western material, which has been one of the main factors driving down premiums in Asia - Chinese exports have

prompted the redirection of other metal to take advantage of the record high premiums in North America. With premiums and

prices now under pressure, the high rate of Chinese exports may slow but it seems likely that they will now act as a swing factor

of supply, which is likely to keep prices and premiums capped until production cuts are made.

Demand second to none – Since 2010, aluminium demand growth has averaged 7.25 percent per year, which is

impressive if to be expected - aluminium has the right attributes to win market share from many other materials. We expect it to

remain a manufacturer's metal of choice but even growth of six percent this year will not be enough to absorb the higher output;

it seems likely that aluminium will remain in a small supply surplus and that apparent supply will be further boosted as off-market

stock returns to market.

Prices likely to remain rangebound – Prices have run into support around $1,750 and, with the market likely to be in

a supply surplus or generally balanced, we feel prices will remain broadly rangebound. There could be short-covering rallies

along the way but we would imagine producers will hedge-sell into those. There is also a danger that more off-market stock

flows back into the market, which could lead to some further price weakness although any such development would be

expected to lead to production cuts, which in turn would lift prices. Prices are expected to range between $1,720 and $1,850 in

the first quarter.

The forward contangos have started to expand, although c-3s remain tight. The wider forwards will facilitate longer-dated financing.

The trend in stocks is down. There was been a blip higher in late February/early March that coincided with c-3s moving into a backwardation ahead of the March date.

Cancelled warrants continue to ease as LME rule changes come

into effect; they may fall faster from June. Physical premiums started to fall in Europe in November and more recently in the US.


Copper

April 2015

8


Copper – Counter-trend move within down channel

Overall trend – Slower growth in China and struggling economic growth in Europe and Japan are causing contagion to

South America and other parts of Asia, all of which bodes ill for copper demand growth. At the same, putting aside production

problems to existing output capacity, copper mine supply is set to grow around five percent as new mines are brought on

stream. So, outside the risk of unexpected production losses the fundamentals of the copper market are generally bearish and,

with prices still above marginal costs of production - these have fallen due to the weaker oil price, the stronger dollar and belt-

tightening - means there is potential room on the downside. Much will depend on how long growth in China continues to slow

and whether the likes of China’s State Reserve Bureau (SRB) steps into the market to build up strategic stockpiles, however.

With the market’s surpluses not expect to be that large, the SRB could absorb the supply surplus but it may decide to wait for

even lower prices before doing so, especially given that another surplus is expected next year. Then again, it may move earlier

if low copper prices start to threaten the integrity of the Chinese copper industry.

Outside China fund activity has been bullish – The funds were getting increasingly bearish on copper at the start

of the year - CFTC data showed the net short fund position on Comex at a fresh high at 41,984 contacts in February, having

being net long last August. The money managers’ net long position on the LME shrank to 7,530 lots late in January from 29,044

lots at the end of 2014. The Comex fund position has now retreated to net short 9,080 contracts while the LME net fund long

position has climbed to 31,076 lots. So fund activity on the LME and Comex has been supporting prices in recent months and,

with gross short positions still large, there may well be room for further short-covering. This is especially the case considering

the tight spreads and the fact a high level of LME stocks are concentrated in the hands of one entity. This could unnerve the

shorts and dissuade new shorts entering the market even though the fundamentals may justify it.

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 22.65

Consumption 19.7 20.39 21.33 21.9 22.55

Balance -0.1 -0.26 -0.27 0.1 0.1

Price $8,810 $7,946 $7,250 $6,860 $5,900

Source: ICSG, FastMarkets forecasts

Summary

Copper prices are stuck in a downward

channel. After bottoming out at

$5,339.50 per tonne in January, prices

are making a counter-trend move. The

down channel seems set to dominate

while the fundamentals are not that

bullish, especially with subdued global

demand growth and supply surpluses

expected this year and next. Supply

disruptions are preventing the surplus

from getting too big but the rise in

exchange stocks and weaker physical

premiums this year are further

indications that there is no shortage of

metal. The stronger dollar and weak oil

prices are also helping to reduce

production costs. Expect producer selling

to cap rallies.


Copper

April 2015

9


High inventories – LME inventories ended March at 332,125 tonnes, up 86 percent from the start of the year. The

backwardation on the LME is no doubt behind the rise but there must be considerable loose supply to facilitate such an

increase. Copper financing programmes post Qingdao have also fallen away and released copper to the market. Stocks in

Shanghai Futures Exchange warehouses have risen to an even greater degree, climbing186 percent to 243,592 tonnes, while

Comex stocks have increased 56 percent to 26,864 tonnes. Collectively, exchange stocks climbed 296,414 tonnes to 602,541

tonnes over the first quarter; high stocks are likely to cap the market on the upside. The rise in stocks in China also points to

sluggish demand - China’s imports of metal have been falling this year although concentrate imports have been rising on the

back of wider T/c and R/c’s

Potential for some short-term gain before further weakness – Fundamentally, the copper outlook is weak but

there may be some seasonal strength that could trigger short-covering. We would, however, expect price strength to be capped

by producer hedge-selling. Much will depend on whether infrastructure and construction spending picks up in China and

whether credit availability improves. There is a good chance they will because Chinese policymakers are unlikely to be prepared

to let annual GDP growth slip much below seven percent. Europe will probably bounce along in low-growth mode for most of

this year while the US is expected to be more robust although it will face its own headwinds in the form of tighter monetary

policy and a slower export market given dollar strength and weakness in overseas economies. Overall, we would expect range-

trading to continue in the $5,900-6,450 range in the second quarter, with the upper price levels likely to be seen during short-

covering rallies. We would look for an average price of $5,900 for the year as a whole.

LME stocks have accelerated higher, which is dampening sentiment; the run-up in cancelled warrants suggests stock outflow will continue to supply the market. The presence of the backwardations shows stocks are tightly held.

The forward curve is in backwardation although it is not as steep as it was, which is not surprising now that prices are lower. Forward buyers may well feel comfortable buying forward at these levels.

The funds' net short position has been shrinking from a record high; this short-covering is expected to underpin a firmer trend for a while longer, although given the fundamental outlook we would not be surprised by fresh short-selling if the rally pushes prices back towards $6,300.

China’s copper imports have started to slow again. The fact that the arbitrage window is closed suggests that only term contracts will be imported. With stocks also high and demand weak in China, imports may well slow further, which could weigh on prices.


Lead

April 2015

10


Lead – Bullish factors mount

Overall trend – The lead market is considered to be fairly well balanced from a supply-and-demand prospective but the trend

in lead prices has been lower since August last year. The drop has taken prices through the lows of 2011 and 2012; prices

rebounded sharply from the lows in those two years and we expect a similar outcome in the weeks ahead. This is especially the

case considering that LME stocks are not that high, that cancelled warrants have shot higher and that the low prices of late are

likely to have led to less scrap lead entering the supply chain. Further supply tightness is likely to develop in the market later in

the year when MMG’s Century mine closes in the fourth quarter. For now we feel lead has become oversold on fund and

momentum selling but we expect prices to recover as the year progresses.

Lead demand in China – One of the negative influences on the price has been a slowdown in demand for e-bikes, which

over the past decade has been a strong driver of demand for lead batteries. But as public transport systems in China have

expanded, e-bike sales have fallen, as has the use of existing e-bikes. E-bike production fell five percent last year and as e-

bikes are used less their batteries do not need replacing so often, which reduces the amount of stock needed. The danger is

that the reduced use of e-bikes leads to more scrapping of units, which in turn could release considerable volumes of scrap lead

into the market, displacing some of the need for primary lead. While the emergence of e-trikes may pick up some of the slack,

the expansion of the public transport network may ultimately mean the e-bike/trike boom for lead has peaked. As well, demand

for cars is expected to expand at a fast pace although it too has slowed to single-digit growth. China’s Association of Automobile

Manufacturers forecasts eight-percent growth in passenger vehicle sales this year but plans to banish old polluting vehicles will

to some extent counter the growth in China’s vehicle population and demand for replacement batteries. Lead demand through

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 $1,950

Source: ILZSG, WBMS, FastMarkets

Summary

Lead prices have been surprisingly

weak so far this year, dropping to a low

of $1,672.50 per tonne in March from a

high of $2,307 in August last year. This

was the lowest prices had been since

June 2010. Even now that prices have

rebounded above $1,800, the market

still looks oversold compared to the

trading range of recent years. These

low prices are likely to disrupt

secondary lead supply while the leap in

cancelled warrants in mid-March is also

likely to lead to considerable tightness

in nearby LME dates. For the second

quarter, we expect a $1,800-2,050

range, with possible spikes to $2,150.


Lead

April 2015

11


industrial batteries is also expected to remain a growth area not just in China but globally, although the metal faces competition

from other types of batteries.

The two arms of supply – At the global level, 54 percent of refined lead production came from secondary lead and 46

percent from primary production. With recycled lead such an important source of supply, the recent weak price may well have

choked off some secondary supply while scrap dealers hold onto scrap until prices recover. So a secondary shortage may be

working its way through the supply chain now. As well, primary supply has already suffered the loss of some 85,000 tonnes per

year of mine output from Paroo Station in Australia, which shut in February due to adverse prices. Later this year, the closure of

the Century mine in Australia could take some 60,000 tonnes of lead from the market. Collectively, these two mines account for

some 1.3 percent of refined output, which in a balanced market is a meaningful amount. Elsewhere, some primary lead

producers are suffering because by-product silver prices are low, as indeed are zinc prices.

Funds net short lead – Money managers on the LME became net short at the start of 2015; the short position increased to

net short 7,085 lots by late-February but it has since shrunk and turned net position by late-March. Lead was the only metal of

which the money managers were net short, which says a good deal about investor sentiment towards the ‘unloved’ metal - we

feel they have may be surprised how bullish lead might become given the potential for scrap tightness and stock drawdowns

after the jump in warrant cancellations. Even though the net fund position has turned positive, there are still 47,330 lots of gross

shorts - equivalent to some 1.18 million tonnes.

Lead's cash-to-threes spread has tightened considerably in recent months, initially ahead of the March date but further still after the massive warrant cancellations on March 20 On that day, 98,350 tonnes of warrants were cancelled, which caused the spread to tighten to a backwardation of $10.25.

LME prices were falling even before LME stocks started to pick up so in some ways it is not surprising prices have been under pressure. Still, since stocks are likely to start falling at a faster pace, we would not be surprised if LME prices move higher again.

LME lead stocks at 234,125 tonnes are some 12,000 tonnes higher than at the start of the year but they remain relatively low. The leap in cancelled warrants means that available lead to provide liquidity to the LME contract has shrunk to just 128,950 tonnes. This could be a concern to the shorts.

In early March, zinc’s premium over lead started to fall - it looked as if there was an unwinding of a long zinc/short lead straddle. The premium rebounded to $300 before the recent rally in lead saw the premium narrow. With lead’s near-term outlook stronger than that of zinc, we would not be surprised if the premium narrows further.


Nickel

April 2015

12


Nickel – Where is the deficit?

Overall trend – Nickel fell sharply in the first quarter of 2015 to a low of $12,310 per tonne at the end of March from a high

near $16,000 in January. Apart from a short-lived spike late in January, the nickel market has remained in a downward trend,

falling about 17.5 percent so far this year, given that a supply squeeze is not likely any time soon. Importantly, the sell-off

appears to have accelerated toward the end of the first quarter, with nickel plunging to its lowest level in six years. While we

maintain the view that the Indonesia story has dramatically changed the fundamental outlook, we contend that other macro

drivers may undermine the bullish thesis in the short term. Still, the fundamental picture in the medium term remains fairly

constructive. For these reasons we anticipate a range for Q2 of $12,000 - $15,000.

Rising LME stocks – LME inventories climbed 59 percent in 2014 to 414,756 tonnes and they continue to rise, up 18,240

tonnes in the first quarter of 2015. This will continue to weigh on sentiment even though the rise in LME inventories does not

appear to be fundamentally driven; rather, it has been due to the Qingdao fraud scandal, which triggered a shift of metal into

LME-listed warehouses from non-exchange sheds in China. Still, given that LME stocks are very large, inventory movements

are likely to become a key price driver. As well, speculators reacted to the rise in LME stocks by increasing their short exposure.

As the latest LME COT report shows, the net length fell 66 percent to 10,407 contracts from the start of the year. The build-up of

short positions (+33,432 contracts) more than offset the accumulation of long positions (+12,712 contracts) in the first quarter of

the year. We believe the fact that speculators have built progressively long positions in the first months of the year suggests that

they see the current price weakness as offering tactical buying opportunities, holding the view that the fundamental picture is

fairly constructive in the medium term.

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 1,990 1,960

Consumption 1,625 1,681 1,790 1,930 1,980

Balance +15 +104 +180 +60 -20

Price $22,853 $17,535 $15,004 $16,867 $14,700

Source: INSG, FastMarkets forecasts

Summary

Nickel prices have continued to decline

in the early months of 2015, driven by

the absence of signs that the underlying

supply-demand balance has tightened

somewhat because of Indonesia’s ban

on ore exports introduced last year.

Indeed, while LME inventories are still

rising, Philippine nickel ore appears to be

a better substitute than many participants

expected and demand is disappointing,

most notably in China. We therefore hold

the view that the sharp sell-off in nickel

prices from the second half of 2014 is

likely to continue in the near term but we

contend that it is largely overdone.

Should a catalyst emerge, the nickel

market seems well placed to rally in

anticipation of firmer fundamentals later

this year and a range of $12,000 to

$15,000 is anticipated.


Nickel

April 2015

13


Philippines is a bearish supply factor in the near term – The quality and quantity of Philippine ore means it has

been able to offset the lack of Indonesian ore supply better than anticipated. The increase in Philippine ore exports has

therefore enabled China to keep its nickel pig iron (NPI) production at a high operating level. In 2014, China imported 36.4

million tonnes of ore from the Philippines, up from 29.6 million tonnes in 2013. But because the Philippines produces nickel ore

with a lower average grade than Indonesia, total nickel units imported have been lower despite the dramatically increase in

volumes to China; NPI production costs have also risen somewhat. China’s nickel ore port stocks have started to fall, dropping

to 20 million tonnes in January from 22.6 million tonnes in December 2014. Although Philippine ore imports are likely to rise

after the monsoon season, the key factor is how long the Indonesian ore stockpile lasts - these are still required for blending

with the Philippine ores to achieve an acceptable grade for cheaper NPI production. We expect NPI output to drop in the second

half.

Demand disappointing in wake of China’s economic deterioration – In China, which consumes about 40

percent of global primary nickel, demand for NPI has not picked up following the Lunar New Year as many observers had

expected. The absence of the ramp-up in NPI demand reflects two factors, in our view. First, recent data suggested that the

Chinese economy continues to slow, with domestic demand for NPI therefore softer; second, the European Union imposed anti-

dumping duties on imports of stainless steel produced in China, which will throttle back Chinese exports and reduce stainless

steel output. India is considering similar measures. As well, China’s stronger environmental protection laws represent an ups ide

risk to prices. During the 2015 National People’s Congress in March, Premier Li emphasised the importance on fighting

pollution, which he called a "blight on people's quality of life". We see weaker NPI output in 2015 because of more producer

closures due to a lack of higher-grade Indonesian ore and the environmental clampdown. The recent advent of the SHFE Nickel

contract has altered the market dynamics somewhat insofar as good volumes of arb trading – selling SHFE and buying LME

have emerged, taking some of the pressure off the prices.

Although nickel ore stocks at Chinese ports are still at a high level, they have started to fall recently. More importantly, Indonesian ore imports are in steady decline.

The switch from forward backwardations to contangos suggests forward buying. This backs up the outlook that supply is likely to be considerably tighter.

LME inventories have continued to climb, rising by 19,000 tonnes so far this year, which is inevitably dampening sentiment – as the stock climb is believed to be due to stock relocation away from China, there may well be a counter-swing back to China once NPI output there falls. This could have a significant impact on sentiment and on LME prices.

A lot of nickel has come out of the woodwork in recent years and stocks are high in terms of percentage of annual consumption. In this light, the weak nickel price is justified but once the tide turns as NPI output slows in China and LME stocks are needed, prices are likely to snap higher.


Tin

April 2015

14


Tin – China’s export scupper Indonesian efforts

Overall trend – Tin prices had held in a broad sideways trend since 2011, oscillating wildly between $17,000 and $25,000,

but the floor was broken in March when they dropped to $16,705 and then $16,395 in early April. What is clear is that there is

more than enough supply, a hypothesis with which World Bureau of Metal Statistics data concurs, putting the market in a 7,300-

tonne surplus in 2014. Although there seem to have been numerous small increases in production in many regions, the main

game-changer has been the export of tin ores and concentrates from Myanmar. This enabled China to revert back to being a

net tin exporter in 2014 for the first time in seven years.

China’s refined tin production climbed 22 percent in 2014 – Chinese imports of ore and concentrates from

Myanmar climbed to 177,950 tonnes (gross weight) in 2014, which the International Tin Research Institute (ITRI) estimates

contained 28,000 tonnes of tin, an increase of some 50 percent on the 2013 total. China’s tin metal production therefore climbed

22 percent to 186,900 tonnes; some of this metal found its way to the export market. Whereas only 937 tonnes of tin ingot were

exported, ITRI estimates some 9,000 tonnes of tin in forms that avoided the 10-percent export levy left the country - this would

account for most of the market surplus. Indeed, Chinese exports have scuppered Indonesia’s attempt to restrict supply and to

maintain prices at high levels.

Indonesian exports fall – Despite the low price, which was meant to choke off Indonesian exports, exports have

continued, with 6,700 tonnes leaving in January and 5,986 tonnes in February. The average for the first two months was 6,378

tonnes, close to the 6,670-tonne average for all of 2014. Total exports in 2014 at 80,044 tonnes was the lowest for eight years

and down from 91,613 tonnes in 2013. The drop in Indonesia exports seems to have been countered by higher Chinese exports

and a pick-up in production elsewhere. For example, the Democratic Republic of Congo reportedly mined 10,756 tonnes of

cassiterite, containing 6,450 tonnes of tin, which was up 42 percent from 2013. There are plans for Indonesian producers to

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

2011 2012 2013 2014 (e) 2015 (f)

Production 360 335 337 354 364

Consumption 365 341 341 347 357

Balance -5 -6 -4 7 7

Price $26,000 $21,114 $22,000 $21,893 $18,000

Summary

Tin has surprised on the downside,

showing that Indonesia’s attempts

to shore up the market by various

means have again failed, especially

with prices falling through the lows

from 2012 and 2011 around

$17,000 per tonne to set a fresh low

at $16,395. Given the fresh low, it

appears that the combination of a

weak demand environment and

broad-based production increases

have weakened the supply/demand

balance. Weaker energy prices and

a stronger dollar may well have

lowered producers’ pain thresholds

but we would expect prices below

$17,000 to be unsustainable.

Source: WBMS, FastMarkets forecasts


Tin

April 2015

15


restrict exports to 4,500 tonnes per month; we wait to see if this underpins the market. Indonesia’s aim is to get prices back

above $20,000. But since the producer talks focus on cutting exports rather than production, it seems as though any agreement

may boost prices but only for as long as they can hold rank. This makes any lasting recovery unlikely until demand improves.

Still, as the price oscillations have shown since 2011, a successful restriction on Indonesian supply can lead to sharp rallies.

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 growth set to slow – Sales of semiconductors (a proxy for demand for electronics/solder)

climbed 9.9 percent in 2014 from 2013, according to the World Semiconductor Trade Statistics (WSTS). Their forecast is for

more moderate growth of 4.9 percent for 2015, which suggests steady demand rather than anything more exciting. The only

point we would make is that these low tin prices could well lead to restocking if broad-based stimulus measures start to raise

economic hopes.

LME stocks relatively low – could underpin price recovery – Judging by LME tin stocks, which stand around

10,000 tonnes, the market may be tighter than prices suggest - stocks have been falling since peaking at 12,190 tonnes in mid-

December. When stocks were last below 10,000 tonnes, LME three-month prices were at $20,195; in February 2014, which was

when LME stocks hit their previous low at 8,065 tonnes, three-month metal was at $23,300. The stronger dollar may well be

dragging tin prices down because it enables non-dollar producers to increase marginal production but lower stocks may well

become a cause for concern before too long. We expect prices to hold a $16,500 to $19,000 range in the second quarter.

The inverse relationship between the price and LME stocks has broken down. This seems unsustainable but is probably a reflection of how the run-up in the dollar has enabled producers to step up marginal production.

As LME prices sink, so has the forward price. But in recent months the cash-15 month spread has widened to around $100 contango from around $30 when prices were above $19,000, suggesting some forward interest.

Global semiconductor sales dipped in December and January although, as the chart shows, the start of the year is when they tend to dip. January sales were up 8.7 percent compared with January 2014 sales – so demand for tin looks steady overall.

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. Will restricting exports to 4,500 tonnes per month fare any better?


Zinc

April 2015

16


Zinc – More bullish than bearish from here

Overall trend – The downward trend dominates the zinc chart - most of last year’s gains have been wiped out, suggesting

the market has unwound the pre-emptive rally that ran well ahead of the fundamentals. This should mean the market is now well

placed to react when supply tightens later this year. The question is whether and when investors, consumers and traders will

start to anticipate the tighter fundamentals again. Having been burned last year, we imagine there would be some reluctance to

jump in too early but potential buyers will not want to miss the boat. As the chart above shows, prices have returned to a long-

term support line so buyers’ confidence might be quite strong - the dip below $2,000 in March seems to have been met by good

buying, although that was also helped by a dollar correction. In the short term, there may be room for another test of support

should the dollar rebound again but we would expect good underlying buying at $2,000-2,050, with resistance above $2,340.

Ample supply now but not for long – Mine supply is expected to tighten considerably at the end of this year once the

Century mine in Australia - with capacity of some 500,000 tonnes per year - reaches the end of its life. Until then, however, the

market faces no shortages; annual TCs have climbed 10 percent to $245 per tonne (basis a zinc price of $2,000), which

suggests miners were aware that smelters faced no shortages of mine supply while at the refined end of the market premiums

are generally weak while the physical market is quiet, which suggests good availability. Supply and demand are fairly balanced,

according to the International Lead and Zinc Study Group (ILZSG), with a deficit of some 10,000 tonnes in November-January,

although December and January were is a slight surplus. With higher TCs, we would expect smelter output to step up, which

should mean the market remains well supplied until mine output starts to fall. When that happens, the market will have to rely

more on stocks.

LME stocks falling, with one large owner of stocks – The fall in LME stocks continues at a steady pace, with

stocks last at around 520,000 tonnes, down from around 690,000 tonnes at the start of the year. Stocks have been falling at an

average rate of 2,876 tonnes per day; at that pace stocks, could be as low as 200,000 tonnes in about 20 weeks. This means

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 $2,250

Summary

Zinc prices have been under pressure

since September, falling 18 percent to

a low of $1,981 per tonne from

$2,416. This has returned prices close

to the long-term support line. A strong

dollar and good supply have weighed

on prices, as has long liquidation after

fund buying in the second and third

quarters of last year. Higher treatment

charges (TCs) show there is ample

mine supply and lacklustre physical

premiums mean there is good supply

and availability. LME stocks have

been falling but much of that outflow is

thought to be metal moving to off-

market warehousing deals. From

these price levels, we are more bullish

than bearish.

Source: ILZSG, FastMarkets forecasts


Zinc

April 2015

17


that LME stocks may be considerably lower just when the fundamentals start to tighten. Such a scenario could create quite a

bullish environment for zinc. Still, with most of the zinc outflow coming from just a few warehouses, it looks as though the metal

is leaving LME sheds not to feed industry but to move into non-LME storage. This raises questions about how tightly held the

off-market zinc will be.

Consumption – Targeted infrastructure projects in China make for bullish readings but with a transition in China away from

exports, fixed asset investment and widespread infrastructure projects, that country's zinc consumption growth rates are likely to

slow, especially with its housing market suffering. The main bright spot for zinc consumption is that the global auto industry is

holding up in China and Europe and remains upbeat in the US. With zinc production growth set to slow next year, it may be just

as well that zinc consumption is set for only moderate growth for a while.

While the forward contangos had been rising of late, indicating forward buying into the price weakness, the recent run-up in prices has seen the forward spreads drop, which suggests forward selling. The drop in spreads will also make financing more difficult.

The drop in LME inventories has accelerated again. If this rate of decline continues, LME zinc stocks could be quite low around the fourth quarter when mine supply starts to tighten.

With stocks falling at a faster pace and cancelled warrants elevated, the amount of freely available zinc in LME- registered warehouses is falling even faster than stocks - there is potential for tightness in the months ahead. Much will depend on how tightly non-LME stocks are held.

Physical premiums for metal in warehouse reflect regional availability and demand. Premiums have eased across all regions in the first quarter. So although the market is expected to tighten later this year, there is little sign of this happening yet.


Steel & Iron Ore

April 2015

18


Steel & Iron Ore – Still oversupplied

Overall trend – Iron ore prices fell almost 50 percent in 2014 when supply ballooned due to new production being ramped up

in Australia. Prices have fallen another 30 percent this year - further output increases have coincided with weak demand. Lower

raw material and production costs have encouraged China’s steel industry to produce in excess - while their hope no doubt was

to export the surplus, this has riled producers in other countries. For now it is difficult to expect a rebound either in iron ore or

steel prices; instead, prices are likely to remain under pressure until more production cuts are made. If the major iron ore

producers were hoping lower iron ore prices would prompt China to abandon its high-cost iron ore production facilities, they may

have misjudged the socio-economic pressures to keep some domestic operations open. This may well mean prices stay down

for an extended period.

Iron ore market structure changes – Supply of iron ore in recent years has been supply-elastic - the market relied on

higher-cost marginal producers to act as swing producers to balance supply and demand. But the effect of the rapid increase in

low cost iron ore, mainly in Australia, has flattened the marginal cost curve and has put more production in the hands of bigger

players that have greater means to outride periods of price weakness. This means supply has become less price-elastic,

especially now that most high-cost production that is still in operation is now in China where the government is keen to keep a

production presence in iron ore for strategic reasons. Some iron ore producers have also benefitted from weaker currencies - a

50-percent drop in the value of the Real to 3.3 to the dollar from 2.17 last summer has helped offset the drop in the dollar-based

iron ore price for Brazilian producers - and from weaker oil prices, which have also lowered production costs across the industry.

The irony is that the onus is now likely to fall more on the iron ore majors, who have been and still are ramping up production,

with some already talking about limiting production. For now, with China’s banks less keen to support stock financing, it looks as

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

Iron ore prices continue to slump

because production increases have

coincided with a slowdown in China’s

economic growth. In addition, the major

iron ore producers seem determined to

gain market share by driving out

marginal producers. To some extent,

lower oil prices have lowered producers’

costs, which in turn have lower the floor

price for iron ore. As of early April,

prices had dropped below $50 per

tonne. Low oil and iron ore prices have

also boosted steel producers' margins,

which has encouraged some to increase

output at a time when demand is not

strong, so steel prices have been falling

too.


Steel & Iron Ore

April 2015

19


though the market will remain oversupplied while the drive to gain market share seems set to keep prices under pressure. We

are looking for price to trade either side of $55 in the second quarter.

Steel industry slowing down – With lower iron ore and oil prices, steelmakers have looked to gain market share by

becoming more competitive but, in a world where demand for steel is weak, this has put prices under downward pressure. The

situation has been made worse where domestic demand is weak, notably in Eastern European and China, and where these

countries have a competitive advantage to boost exports - either through weak currencies or because they use cheap iron ore

as feed. While producers push their export potential, more anti-dumping duties are being applied, especially to Russia and

China. In turn, this is leading to cuts in steel output. China’s output is also likely to fall while the government tightens

environmental legislation, which may mean China’s steel production falls this year for the first time since the early 1980s. But

the export drive has driven down steel prices.

HRC prices slide – Steel prices have been under pressure because of poor demand and because steelmakers have been

encouraged to boost production as their inputs costs have fallen. US HRC prices (FOB mill) fell to $460 per tonne in early April

from $600 in December and around $690 in May last year. Weak domestic demand and weak currencies in many steel-

producing countries have bolstered export activity, pushing steel prices lower.

Supply outweighs demand – The iron ore and steel markets are suffering a double whammy - a surge in iron ore

production and low oil prices have reduced producers’ costs and encouraged oversupply while demand is weak. Steel

production is likely to be more active in adjusting to this state of affairs, while iron ore and oil supply may take longer to react.

These factors are likely to keep prices subdued overall.

HRC steel prices in North America had held up well last year but they have caught up with price weakness in other regions this year while imports flooded into the region.

The drop in iron ore prices is expected to have most impact on the non-major producers, those outside Australia and Brazil.

The forward curve for iron ore swaps is fairly flat, suggesting the market does not expect any quick pick-up in iron ore prices. In April, second-half 2015 forward prices were indicated around $46.

Global steel output has been trending lower as prices have fallen on oversupply and weak demand. With production cuts and import restrictions now likely to stabilise prices, production is expected to recover slowly.


Gold

April 2015

20


Gold – looking vulnerable as resistance persists

Overall trend – Gold was bolstered early in the first quarter by flight-to-safety demand in response to renewed Middle East

violence and aggressive monetary easing by numerous central banks. But its failure to extend above $1,300 per ounce weighed

on confidence and has triggered a test back towards the November low. Persistent overhead resistance continues to threaten

near-term price sentiment.

Fund Activity – Comex speculators lent upside momentum to gold across January when new longs and short-covering

lifted the NLFP to 188,925 contracts. Gold's failure to extend above $1,300 has since triggered stale liquidation from

speculators, with the NLFP back to 54,281 contracts late in March. With limited short-covering noted - gold recovered only to

$1,200 late in March from $1,155 - we feel speculators are becoming less bullish.

ETF investment activity – A flight to safety helped to bolster ETF holdings across the first quarter but the stalling of

prices has given rise to disinvestment, which has acted as a drag. Net holdings in the funds we monitor stand some 38 percent

below their end-2013 peak but the prospect of higher interest rates will continue to threaten further stale liquidation while

investors seek higher-yielding assets.

Physical demand – Lunar New Year celebrations helped support gold demand in China, with the latest SGE withdrawals

figures suggesting wholesale Chinese gold demand is running 10 percent above year-ago levels. In India, buyers delayed

purchases ahead of the budget at the end of February. While there was disappointment that the government held import duties

Global supply/demand balance gold (tonnes)

2011 2012 2013 2014 (e) 2015 (f)

Supply 3,994 4,464 4,273 4,278 4,100

Demand 4,067 4,589 4,088 3924 4,350

Stock flow -73 -125 186 355 -250

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

Source: FastMarkets, WGC, Thomson Reuters GFMS

Summary

Despite an initial lift from safe-haven

demand early in the year, gold

remained overshadowed by dollar

strength - markets continued to price

in the start of higher interest rates in

US later this year. Seasonally strong

physical demand helped cushion the

impact of speculative and investor

disinvestment and will continue to do

so into the second quarter. But while

this demand fades, gold will be

increasingly vulnerable to downside

pressure, we feel. Still, the dollar may

have run ahead of itself so a period of

dollar weakness could provide some

lift. For the second quarter we are

looking for a range of $1,170-$1,250

per ounce.


Gold

April 2015

21


at 10 percent, buyers have responded to lower prices, with restocking seen ahead of the festival of Akshaya Tritiya in mid-April.

While several auspicious dates on the Hindu calendar between now and mid-June will help support physical demand in India, it

is expected to slow overall into the mid-year.

Central banks – Central banks remained net buyers of gold in 2014, adding 477 tonnes to reserve holdings last year. This

marked only the second year of net purchases over the past 50 years, according to the World Gold Council. Further

diversification among central banks in emerging markets (EMs) should provide a source of net demand but there have been

reports recently that Venezuela is looking to monetise a proportion of its holdings as part of a swap deal. Given the volatility in

EM economies after the Federal Reserve initially sought to taper its asset purchases, coupled with the drop in oil and other

commodity prices, the monetisation of central bank holdings could become a larger factor in the medium term.

After the initial gains in January, the historical inverse correlation between gold and the US dollar continued to feature heavily on the gold price across the first quarter. Stronger US economic activity and the prospect of higher interest rates will continue to act as a drag on prices in the near term.

The chart above reflects the surge of demand from the physical sector in the latter part of 2014 in contrast to the cautious stance in early 2015. We note the acceleration in gold imports into India in March, with provisional figures indicating imports in excess of 130 tonnes. We have not included imports for China and Turkey.

ETF holdings in Europe have been bolstered by the relative strength of euro-denominated gold prices. Yet we feel ETFs will remain a supply source in 2015, albeit at more modest levels while US investors in particular seek higher-yielding assets.

The chart above reflects the impact ETF exposure has had on the underlying gold price. While it is difficult to quantify when investors have taken profit, we look at the scale of holdings added in 2009, which saw 674 tonnes at an average price of $973 per ounce, as potentially vulnerable.


Silver

April 2015

22


Silver – Overhead pressure persists

Overall trend – Silver enjoyed a stronger first quarter of 2015 after it fell almost 20 percent in 2014. Jewellery and

investment-related demand will continue to provide underlying strength while India maintains its import duty on gold at 10

percent while investors look to hedge against the potential longer-term inflationary pressures from quantitative easing. Although

the popularity of smartphones and the expansion of solar power generation will help support industry-related silver demand,

miniaturisation will remain a drag. Still, silver continues to face mounting pressure as rallies encounter strong selling. Again, we

feel this relates to producer hedging after global mine production increased 3.2 percent last year, according to WMBS figures,

and is expected to expand further in 2015 thanks to projects in progress in Latin America. Overall, we expect silver to follow

gold’s lead - we are looking for prices to trade in a $16-18.50 range in the second quarter.

In contrast to gold, silver ETF exposure weakened across the quarter amid signs of stale liquidation. In historical terms, though, silver exposure remains strong, with holdings just shy of their all-time record reflecting demand among smaller investors in the market.

As was the trend in much of 2014, fluctuations in speculative net length continue to be driven by short exposure. But with open longs among Comex funds around 10 percent above the 2014 average, stale liquidation could lend addition price pressure.

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

Silver enjoyed a stronger first quarter

after the near-20-percent price drop in

2014. Yet the strength of the US dollar

and the prospect of higher US interest

rates later this year will continue to

negate any positive demand

expectations because jewellery and

investment demand are supported by

industrial demand related to stronger

GDP growth. We feel rallies will

struggle amid elevated fund long

exposure and the likelihood of further

producer-related selling.


PGMs

April 2015

23


PGMs – Dollar strength tests investor confidence

Overall trend – Sentiment in both platinum and palladium weakened significantly across the first quarter - failure to move

above overhead chart resistance at $1,250 per ounce in platinum and $850 in palladium has triggered stale liquidation from

Nymex speculators and ETF investors. Given the weakness already seen and the strength in auto sales as well as platinum’s

discount to gold, prices may have overshot on the downside, we feel - our forecast ranges for the second quarter are $1,100-

1,250 for platinum and $750-850 for palladium.

Supply looking stronger – we maintain that platinum and palladium will remain in fundamental deficits in 2015 given the

growth in autocatalyst-related demand. Yet developments indicate the market will remain amply supplied. Above-ground

platinum stocks were at 2.8 million ounces at the end of 2014, the World Platinum Investment Council estimates, despite their

being heavily drawn on because of prolonged industrial action by South African miners. The Russian central bank's decision “in

principle” to liquidate some of its palladium stocks could also alleviate apparent tightness. Meanwhile, the longer-term outlook

for platinum has become somewhat clouded while South African producers look to dispose of high-cost mines while diesel-

powered cars sales face increasing headwinds over environmental/health concerns

Investor ETF exposure weakened early in 2015, reflecting stale liquidation among more speculative investors in the US and Europe. The threat of further disinvestment will remain a drag although South African investors showed dip-buying interest late in March.

Globally vehicle sales remain on an upward trajectory. Accumulated sales in China, the US and EU stood up 6.2 percent on January-February 2014, which together with tighter emission controls will continue to support robust PGM demand from the autocatalyst sector.

Summary

Solid growth in global vehicle sales continues to support robust PGM demand expectations but persistent dollar strength has

undermined investor confidence and will drag on prices, we feel. The threat of supply disruptions remains but SA mine

supplies are expected to be far stronger. Russian central bank sales will act as a price drag.

Platinum Palladium


Appendices

April 2015

24


Appendices

Market Overview Appendix

Global manufacturing PMIs

USA (ISM) Japan China (HSBC) Eurozone Germany France Italy

Mar-15 51.5 50.3 49.6 52.2 52.8 48.8 53.3

Feb-15 52.9 51.6 50.7 51.0 51.1 47.6 51.9

Jan-15 53.5 52.2 49.7 51.0 50.9 49.2 49.9

Dec-14 55.5 52.0 49.6 50.6 51.2 47.5 48.4

Nov-14 58.7 52.1 50.0 50.1 49.5 48.4 49.0

Oct-14 59.0 52.4 50.4 50.6 51.4 48.5 49.0

Sep-14 56.6 51.7 50.2 50.3 49.9 48.8 50.7

Aug-14 59.0 52.2 50.2 50.7 51.4 46.9 49.8

Jul-14 57.1 50.5 51.7 51.8 52.4 47.8 51.9

Jun-14 55.3 51.5 50.7 51.8 52.0 48.2 52.6

May-14 55.4 49.9 49.4 52.2 52.3 49.6 53.2

Apr-14 54.9 49.4 48.1 53.4 54.1 51.2 54.0

Mar-14 53.7 53.9 48.0 53.0 53.7 52.1 52.4

Feb-14 53.2 55.5 48.5 53.2 54.8 49.7 52.3

Jan-14 51.3 56.6 49.5 54.0 56.5 49.3 53.1

Dec-13 57.0 55.2 50.5 52.7 54.3 47.0 53.3

Nov-13 57.3 55.1 50.8 51.6 52.7 48.4 51.4

Oct-13 56.4 54.2 50.9 51.3 51.7 49.1 50.7

Sep-13 56.2 52.5 50.2 51.1 51.1 49.8 50.8

Aug-13 55.7 52.2 50.1 51.4 51.8 49.7 51.3

Jul-13 55.4 50.7 47.7 50.3 50.7 49.7 50.4

Jun-13 50.9 52.3 48.2 48.8 48.6 48.4 49.1

May-13 49.0 51.5 49.2 48.3 49.4 46.4 47.3

Apr-13 50.7 51.1 50.4 46.7 48.1 44.4 45.5

Mar-13 51.3 50.4 51.6 46.8 49.0 44.0 44.5

Feb-13 54.2 48.5 50.4 47.9 50.3 43.9 45.8

Jan-13 53.1 47.7 52.3 47.9 49.8 42.9 47.8

Source: HSBC, Markit, ISM, FastMarkets


Appendices

April 2015

25


Aluminium appendix

The drop in aluminium stocks in LME-

listed warehouses is gaining momentum

even if much of the stock is probably

heading to other off-market warehouses.

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.

Chinese imports and exports of primary

metal are insignificant - the country

produces more than it uses while exports

are taxed. The export of aluminium semis is

increasing significantly.

IAI production data shows global

output climbed sharply so far in

2015; we expect this to keep

pressure on prices and may lead

to another round of production

cuts.


Appendices

April 2015

26


Aluminium appendix cont.

PERIOD AFRICAASIA (EX

CHINA)GCC CHINA

CHINA

ESTIMATED

UN-

REPORTED

NORTH

AMERICA

SOUTH

AMERICA

WEST

EUROPE

EAST &

CENTRAL

EUROPE

OCEANIA

ROW EST.

UN-

REPORTE

D

TOTALDAILY

AVERAGEChina RoW

FEB 2015 128 218 389 2203 300 350 102 280 293 151 90 4504 160.9 2503 2001

JAN 2015 143 238 426 2119 300 387 116 307 321 166 90 4933 159.1 2419 2514

Dec 2014 142 233 427 2181 300 386 119 306 323 167 90 4674 150.8 2481 2193

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 4330 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 4251 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

Global Aluminium Production '000 tonnes


Appendices

April 2015

27


Copper appendix

Copper start-ups and expansions (excluding China)

Mine Owner Country 2015 expected production 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 120,000 Start-up was delayed

Las Bambas MMG Peru First production Q1 2016

Global copper production and consumption (thousands of tonnes)

2010 2011 2012 2013 2013

Jan-Dec 2014

Jan-Dec 2015 (f)

Mine production 16,044 16,053 16,688 18,111 18,111 18,344 19,816

Refined production 18,987 19,600 20,202 21,084 21,084 22,561 23,086

Refined capacity utilisation 80.7 81.6 80.6 79.8 79.8 82.6

Consumption 19,137 19,705 20,457 21,354 21,354 23,036 22,692

Refined balance -150 -105 -255 -270 -270 -475 393

Period stock change -178 7 171 -51 -51 15

Refined stocks (end period) 1,198 1,205 1,376 1,325 1,325 1,340

Source: ICSG (forecast from Oct 2014)

Source: FastMarkets


Appendices

April 2015

28


Lead appendix

World Refined Lead Supply & Usage 2010-2014

'000 tonnes 2011 2012 2013 2014 2014 2015 2014-2015

Jan Oct Nov Dec Jan

Mine Production

4,644 5,035 5,435 5,312 403 419 479.6 514.9 453.7 419.2

Metal Production 10,605 10,549 11,121 11,246 901 906 995.9 1,017.4 956.9 906.3

Usage 10,443 10,483 11,119 11,259 935 915 1,014.4 1,038.8 948.8 914.9

Balance 162 66 2 -13 -34 -9 -18.5 -21.4 8.1 -8.6

Source: ILZSG, FastMarkets

Lead concentrate imports by China have

slipped in recent months, which is not

surprising because there have been reports of

capacity closures and slowing operating rates

at smelters.

The LME Commitment of Traders report shows

how money managers, both long and short,

have been building positions. The market has

become more polarised but it has just turned

net long for the first time since the end of last

year.


Appendices

April 2015

29


Tin appendix

Top 10 Tin Producers (tonnes) 2012 2013 2014 Change

Yunnan Tin (China) 69,760 70,383 75,924 8%

MSC (Malaysia) 37,792 32,668 35,152 8%

PT Timah (Indonesia) 29,512 23,718 27,550 16%

Minsur (Peru) 24,822 24,397 24,223 -1%

Yunnan Chengfeng (China) 16,600 18,300 22,900 25%

Thaisarco (Thailand) 22,847 22,986 17,085 -26%

Guangxi China Tin 14,034 11,870 12,200 3%

EM Vinto (Bolivia) 11,241 11,253 11,806 5%

Metallo Chimique (Belgium) 11,350 10,344 9,814 -5%

Gejiu Zi-Li (China) 7,000 6,000 7,000 17%

Total 244,958 231,919 243,654 5%

Souce: ITRI

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 19,676

03-Feb-15 22,900 18,987

03-Mar-15 23,495 17,801

02-Apr-15 16515 16,744

Source: LME, ICDX


Appendices

April 2015

30


Zinc appendix

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

2010 2011 2012 2013 2014 2014 2015 2014-15

Jan Oct Nov Dec Jan

Mine Production 12346 12590 13111 13190 13433 1034 1036.4 1172.0 1238.3 1166.3 1036.4

Metal Production 12896 13064 12630 12872 13522 1089 1122.5 1170.8 1213.7 1193.4 1122.5

Metal Usage 12649 12699 12386 12970 13832 1138 1120.6 1132.6 1227.7 1191.6 1120.6

Balance 247 365 244 -98 -310 -49 1.9 38.2 -14 1.8 1.9 Source : ILZSG

Zinc concentrate imports

(metal contained) fell in

February due to the lunar

New Year but are generally

on the rise as the country

builds up stockpiles. The

higher treatment charges are

also an extra encouragement.

The accelerated fall in zinc

stocks on the LME means stocks

as a percentage of annual

consumption have started to fall

at a faster pace – but that said,

much of the metal is thought to

be going into off-market

financing deals.

Contact Details

31


London Sucden Financial Limited Plantation Place South 60 Great Tower Street London EC3R 5AZ Tel: +44 (0) 20 3207 5000 Fax: +44 (0) 20 3207 5010 Email: [email protected] www.sucdenfinancial.com

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Moscow Sucden Financial (Russia) Sucden Financial Limited Representative Office Orlikov per. 3 ‘B’ Moscow 107139 Tel: +7 495 796 96 40 Fax: +7 495 796 96 41 Email: [email protected] www.sucdenfinancial.ru

32


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