The Natixis Metals Review:  2015H1 notes that in recent years, the global economy has been underpinned by both central bank and in many cases government support for economic activity, propping up what would otherwise have been anaemic rates of growth. Over the period 2015-16, this situation is expected to change perceptibly. In the US, the Fed is expected to begin normalising monetary conditions as the US labour market finally approaches full employment once again. In Europe, years of under-performance are finally expected to be replaced by stronger economic growth, not least thanks to the ECB’s implementation of quantitative easing. Whether Japan can rediscover growth through Abenomics remains to be seen.

Across the developing world, economic performance is expected to diverge markedly. In China, although the rate of growth is expected to slow only marginally, this will coincide with a huge change in the underlying structure of the economy, from unsustainable investment-led growth to a more sustainable model based around consumption, innovation and the influence of the price mechanism. In India, years of sub-par growth are expected to give way to stronger economic activity, supported by pro-growth policies of the new Modi government. In Brazil and Russia, economic conditions are expected to remain extremely challenging, suggesting a potential economic contraction in 2015.

The pursuit of quantitative easing by the ECB and BoJ, at a time when the US Fed is expected to begin raising interest rates, is leading to a sharp realignment of currencies, with the dollar strengthening to its highest level in over a decade.

Another key development for metal markets is the recent fall in oil prices, boosting economic activity in oil consuming countries at the expense of deteriorating fiscal balances among oil producing countries.  Against this backdrop, we expect world growth to improve marginally over the coming two years.

In the base metal markets, our assessment of market balance has been complicated significantly by the major structural change now occurring in China.  For some metals, curtailment of excess capacity has scope to result in significant changes in either supply of or demand for base metals.  In similar fashion, forecasting the potential strength of Chinese exports of metal and metal products is fraught with uncertainty.

Precious metal markets are expected to remain fixated upon the decisions facing the US Fed this year.  When to begin normalising rates, and what effect will this have upon the rapidly strengthening dollar?

For both base and precious metals, the effects of the lengthy investment cycle will be of crucial significance.  Current low prices may be deterring investment, but it can take 4-6 years before the full effects of changing investment decisions are felt in terms of mine output.

Aluminium

After experiencing a roller-coaster ride in 2014, significant swings in LME aluminium prices are expected to continue in 2015-16 as strengthening medium-term fundamentals risk being undermined by negative factors in the short term.  While the global aluminium market is expected to experience deficits over the coming years, it will still take some considerable time before aluminium inventories are brought down to more “normal” levels.

One factor that may put pressure on aluminium prices in the near term is the potential for aluminium premiums to extend their recent decline.  This fall in premiums is damaging the economics of financing trades, with the result that more metal is becoming available within the market.

While the eventual trajectory for aluminium prices is expected to be upwards, there remain significant risks that could lead to bouts of recurrent weakness in the immediate future.  For 2015, we forecast an average aluminium price of $1,840/t, to be followed by $2,000/t in 2016.

Copper

We have been bearish on the outlook for copper prices since 2013, arguing that a move from deficit to surplus would be accompanied by a fall in copper prices and a shift in the shape of the forward price curve from backwardation to contango.

Alongside a progressive decline in copper prices, growth in mine output is slowing perceptibly.  This is contributing to a decline in TC/RCs, which is expected to slow the growth in output of refined copper in 2015-16.

With the sharp drop in copper prices in January this year, we believe that a multi-year adjustment in the copper price is now largely complete.  Yes, there is scope for spot prices to suffer a little more in the near term if the forward curve were to complete its transition from backwardation to contango, but the shift from 2014-15 surplus to 2017-18 deficit should gradually provide increasing support for copper prices over the coming years.

In our central scenario, we expect copper prices to average $6,150/t in 2015, rising to an average of $6,800/t in 2016.

Lead

The global lead market has been subject to immense upheaval over recent years, with huge structural changes taking place in the lead industry in both the US and China, the two largest markets for lead.  This has resulted in a high degree of uncertainty relating to the fundamentals underpinning lead supply and demand.

In our central scenario, Chinese demand for lead is expected to change from yoy declines over the past two years to very slow growth in 2015-16.  Depending on the pace at which e-bike demand for lead diminishes, this could prove to be an overly optimistic assessment.  New environmental regulations are expected to dampen Chinese mined output of lead, but at the same time are likely to encourage lead recycling.  Again, both of these assumptions are open to some degree of doubt.

Our forecast for a lead surplus of 90,000 t in 2015 suggests that lead prices are unlikely to perform well this year.  However, with prices recently hitting five-year lows below $1,700/t, depressed by the recent strength of the dollar, scope for further significant price falls appears limited.  We would therefore envisage lead prices remaining muted, trading in a range between $1,700/t and $1,900/t.  In our central forecast, we would suggest an average price of $1,800/t in 2015, to be followed by $1,850/t in 2016.

Nickel

The global nickel market has been subject to significant upheaval in recent years, causing a high degree of price volatility.  Between 2009 and 2013, Chinese stainless steel producers expanded production rapidly, supported by imports of Indonesian nickel ore.  After Indonesia introduced a ban on exports of unprocessed raw material, this dependence was forced to shift from Indonesia to the Philippines.

Has Chinese output of stainless steel grown too rapidly?  The current shift from an unsustainable investment-driven growth model to a more sustainable model based upon consumption, innovation and the price mechanism is already leading to substantial change in China’s steel industry.  Whether this proves to be equally negative for the country’s stainless steel industry remains to be seen, but the drop in Chinese apparent demand in 2014 is certainly a worrying development.

Close study of the supply side of the nickel market gives us a relatively clear picture of likely developments in 2015-16, but the potential strength of demand for nickel is much harder to gauge, resulting in a significant degree of uncertainty in our forecasts for market balances and nickel prices in the years ahead.  Our central scenario envisages nickel prices averaging somewhere around $14,500/t in 2015.  For 2016, prices are expected to improve only modestly, rising perhaps to an average of $15,300/t.

Zinc

The zinc market is moving inexorably from surplus to deficit. This prompted a sharp rise in prices during 2014H2, which encouraged a supply response in the form of higher Chinese output.  Since then, zinc prices have softened, slipping back to $2,000/t in March.

From 2015H2, we expect the next bout of scarcity, brought about by the closure of both the Century mine in Australia and Lisheen in Ireland, to result in a renewed upward trend in zinc prices.  If Chinese producers are not able to respond so easily with higher output this time around, the rise in zinc prices might be more sustainable during 2015H2 and 2016.  Our central forecast for zinc anticipates an average price of $2,225/t in 2015, rising to $2,520/t in 2016.

Gold

In the period between 2003 and 2012 gold miners invested heavily in mine expansion and ramping up production.  Following the 2013 collapse in the price of gold, producers instead turned to cutting Capex.  As a result of these previous investments, gold mined output has continued to rise, and in 2014 mined output rose by 2.25% yoy to 2,875 tonnes.  New mines take around five years to come on-stream, as such the sharp drop in investments will most likely only show up in 2017-8.

In the meantime, higher output and lower investment demand is expected to weigh on gold prices.  Our view is that a rise in US interest rates may push gold prices to lower levels as the opportunity cost of holding the metal rises and the need for a safe haven dissipates.

For 2015 we forecast that gold prices will average $1,150/oz, followed by $1,055/oz in 2016.

Silver

We expect that the positive correlation between silver and gold prices will remain strong in 2015; so far this year it has been at around 0.87.  Nevertheless, the beta between silver and gold prices appears to have fallen in recent years.  In 2014, for every 1% daily movement in the price of gold, silver prices changed by only 1.26% compared with 1.65% in 2011. Since January 2014 the beta has been 1.27.

As with gold, we expect that the main pressure on silver prices will come from the stronger US dollar and higher US interest rates.  Silver is especially sensitive to the US market where the metal has a wider popularity with retail investors than in other developed countries.

Based on our positive outlook on the US economy and additional downside risks linked to silver prices (potential outflows from investment demand and low cash cost of production), we forecast silver prices will average $15.5/oz in 2015 and $13.5/oz in 2016.

Platinum

As a result of last year’s strikes, it is estimated that mined supply of refined platinum dropped by 11% yoy in 2014 to 161 t which in turn pushed down total supply by 8% yoy to 224 t.  Higher output from recycling has been offsetting efforts by miners to reduce platinum output.  Scrap supply of platinum is expected to have risen by 13% yoy in 2014 to a record of 71 t.

We expect demand for platinum will improve in 2015.  New automobile sales in Europe are expected to grow and so is jewellery demand from China.  This should be supportive for platinum prices which lately have been strongly positively correlated with gold.

In our base case scenario we see platinum prices averaging $1,285/oz in 2015 and $1,500/oz in 2016.

Palladium

At the beginning of 2014, palladium prices rose strongly due to the unfolding of the Russia and Ukraine crisis.  The market has therefore factored this into current price levels, and it would take a further escalation of the conflict in order to support palladium prices in 2015.  Although automobile sales in the US, China and India are expected to grow this year, we are pessimistic on the outlook for Russia and Brazil, suggesting only modest global growth in demand for palladium.

In our base case scenario we see palladium prices averaging $775/oz in 2015 and $740/oz in 2016.