Metals Market Monthly Outlook November 2014 Helcio S. Takeda

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1 Metals Market Monthly Outlook November 2014 Helcio S. Takeda Falling commodities prices: signs of challenging times. Aluminum is on upside and nickel seems mean reverting. The month of October was marked by another drop in most of the commodities prices. According to data compiled by the IMF, the index of all commodity prices, which was positive by 0.5% up to the end of the first half of this year, is now 14.4% lower, both compared to the level observed in the end of The most notable reversion in the last month was in the price of energy especially crude oil. October was marked by another drop in most of the commodities prices. The most notable reversion in the last month was in the price of energy - especially crude oil. IMF - Commodity Price Index (2005 = 100) 300,0 250,0 200,0 150,0 100,0 50,0 0,0 jan/00 out/00 jul/01 abr/02 out/03 jul/04 abr/05 out/06 abr/08 out/09 abr/11 out/12 abr/14 All Commodity Price Crude Oil (petroleum) IMF - Commodity Price Index (% chg compared to Dec 2013) Jan-Oct ,45% -14,44% Jan-Jun ,48% 2,58% -20,0% -15,0% -10,0% -5,0% 0,0% 5,0% All Commodity Price Crude Oil (petroleum) 1

2 Two reasons may explain this change in the trend of input prices: a rebounding US economy versus a weakening rest of the world. In developed world ex-usa, risks of deflation supports loosened monetary policy. In emerging economies, imbalances need to be adjusted. We may summarize reasons behind this impressive change in the trend of input prices into two: a rebounding US economy versus a weakening rest of the world. A strong US economy backs normalization path to the monetary policy. FOMC already ended bonds purchase program in its last meeting. There are expectations that time of raising interest rate is sooner than later. Nonetheless, there is also prospect of a weakening rest of the world and it is a non-negligible warning. The IMF revised down its forecast for global growth in 2015, from 4.0% in July to 3.8% in October pushed by downward correction in the forecasts for the Euro area and emerging economies. In developed world ex-usa, Japan and the Euro area are still running a loosened monetary policy although in the UK, interest rate may rise soon. Risks of a deflation are more likely than the opposite especially if this current falling commodity prices scenario deepens. The IMF attributes a 40% probability Euro area countries may fall back into recession. In the emerging world, countries of BRICS block are in tough situation. Brazil needs to adjust most of the imbalances of the last four years. Russia is facing a currency crisis on the back of lower oil prices and geopolitical tensions. China is pursuing a rebalanced economy, but monitoring political and social implications. And it is all happening under a more challenging economic environment. This may be one of the reasons why markets are not pricing a 10-year Treasury bond yield above 3% p.a., but they are betting in a strong USD. Perhaps, the combination of both asset prices are telling us investors are searching for protection rather than boosting profits. DXY 88,0 86,0 84,0 82,0 80,0 78,0 76,0 74,0 72,0 70,0 jan/08 jul/08 DXY versus UST 10y jul/09 jan/10 jul/11 jul/12 jan/14 jul/14 5,5 5,0 4,5 4,0 3,5 3,0 2,5 2,0 1,5 1,0 UST 10y (% p.a.) DXY UST 10y 2

3 Mixed performance in the metals and minerals industry. Iron ore fell for the third month in a row. In the metals and minerals industry, prices were mixed in October. Price of iron ore fell for the third month in a row and following a double digit decline in September. Among base metals, we saw falling prices in nickel, lead and tin. Prices of copper, zinc and aluminum rose, but not enough to recover the same level observed in August. 200,0 180,0 160,0 140,0 120,0 100,0 80,0 60,0 40,0 20,0 0,0 jul/05 jul/06 China import Iron Ore (USD/mT) jan/08 jul/08 jul/09 jan/10 jul/11 jul/12 jan/14 jul/ Nickel (Cash Settl., USD/ton) Lead (Cash Settl., USD/ton) Copper (Cash Settl., USD/ton) Aluminium (Cash Settl., USD/ton) Zinc (Cash Settl., USD/ton) Aluminum is the top best performer of the year, surpassing nickel. Aluminum has shown a positive performance in the year, becoming the top best performer among base metals. Nickel, on the other hand, is correcting the huge increase in its price observed in the first half of this year. Price of Base Metals - % chg Year to Date (eop) Aluminum Nickel Zinc Copper Lead Tin -8,91% -7,56% -5,58% -8,66% -9,84% -10,75% 9,66% 16,58% 18,15% 13,21% 9,81% 11,96% -15% -10% -5% 0% 5% 10% 15% 20% up to Sep up to Oct 3

4 Market conditions still supportive for aluminum. For aluminum, market conditions look supportive for this positive performance. The growth rate of supply has declining, reflecting a lower price observed in the recent past and increasing energy costs. The adjustment in output is concentrated in the Western Hemisphere. In China and in the Gulf Aluminum Council (includes Bahrein, Oman, Qatar and United Arab Emirates), output is still increasing, according to IAI (International Aluminum Institute) Production of Primary Aluminum (thousand of ton.) Source: IAI jan/00 out/00 jul/01 abr/02 out/03 jul/04 abr/05 out/06 abr/08 out/09 abr/11 out/12 abr/14 World (ex-china) China Inventories reported by LME (London Metal Exchange) also support higher prices, although it is not clear if metals once stored at LME warehouses are moving into non-ruled warehouses Aluminium Inventories (ton) Nickel: opportunities for financing activities in the short end of the curve. For nickel, our econometric model suggests price fluctuating in a wide range. However, confronting results of the model with the economic environment, there are few reasons to expect prices going above USD 18,000/mt level. It is more likely prices will stay swinging between USD 14,000/mt and USD 16,000/mt range in the short term. High level of inventories and a contango slope of forward curve of prices indicate good opportunities for financing activities in the short end of the curve. 4

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