Commodities Research (Mining & Metals)

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1 May 215 Global Metals Monthly Outlook: Prices rebound as US Dollar weakens Summary Helcio S. Takeda Head of Commodities Research 55 (11) The change in the prices of non-ferrous metals was positive in April. The price of lead and zinc negotiated at the LME increased sharply respectively 17.5% and 13.5%. Nickel climbed 11.2% and primary aluminum, 6.7%. Price of copper rose for the 3rd month in a row (3.2%). Tin kept the bearish trend (-4.2%), 5th consecutive decrease. In the year (January to April), lead is the top performer, followed by zinc and aluminum. The jump in the price of lead and zinc in the last month helped to revert the negative performance observed in the year up to March. Tin replaced nickel as the worst performer of the year. On the macro side, some indicators have supported a view that the US Federal Reserve might postpone the beginning of the rising interest rate cycle. While the US economy is still in a good shape, two relevant indicators were weaker than expected. The advance estimate of the US GDP, released by the Bureau of Economic Analysis, showed a sluggish.2% s.a.a.r. in the Q Besides, The US Labor Department reported an increase of 223, in the non-farm payroll, below market expectations. In a broad view, monetary policy stance has become more accommodative. It has not changed in the Euro region and in Japan. In China, it has been eased. And in the USA, Federal Reserve has suggested a less hawkish mode, increasing the likelihood of the rising interest rate cycle to start sometime between the end of this year and the beginning of the next. As a consequence, the US dollar index () has loosened track recently. We still believe strengthening cycle is not over and it will resume sometime in the near future. Nevertheless, since the and the price of base metals are negatively correlated, the recent weakness of the US dollar is supportive for the increase in the price of non-ferrous metals. 1

2 May 215 Prices rebound as US Dollar weakens The change in the prices of non-ferrous metals was positive in April. The price of lead and zinc negotiated at the LME increased sharply respectively 17.5% and 13.5%. Nickel climbed 11.2% and primary aluminum, 6.7%. Price of copper rose for the 3rd month in a row (3.2%). Tin kept the bearish trend (-4.2%), 5th consecutive decrease. Chart 1. Price of base metals In the year (January to April), lead is the top performer, followed by zinc and aluminum. The jump in the price of lead and zinc in the last month helped to revert the negative performance observed in the year up to March. Tin replaced nickel as the worst performer of the year jan/3 set/3 mai/4 Copper (Cash Settl., USD/ton) set/5 mai/6 set/7 mai/ Aluminium (Cash Settl., USD/ton) jan/3 set/3 mai/4 set/5 mai/6 set/7 mai/8 Nickel (Cash Settl., USD/ton) jan/3 set/3 mai/4 set/5 mai/6 set/7 mai/ jan/3 set/3 mai/4 set/5 Zinc (Cash Settl., USD/ton) mai/6 set/7 mai/8 Lead (Cash Settl., USD/ton) jan/3 set/3 mai/4 set/5 mai/6 set/7 mai/8 Tin (Cash Settl., USD/ton) jan/3 set/3 mai/4 set/5 mai/6 set/7 mai/8 2

3 May 215 In the opposite direction to the non-ferrous metals, the price of China import iron ore (62% Fe) dropped for the 9th month in a row in April, from $56.94 to $51.15, although recovering from the bottom of $46.7. Chart 2. Price of iron ore 2, 18, 16, 14, 12, 1, 8, 6, 4, 2,, jul/5 jan/6 jul/6 China import Iron Ore (USD mt) jul/7 jan/8 jul/8 jul/9 jan/1 jul/1 jul/11 jan/12 jul/12 jul/13 source: IMF jan/14 jul/14 Macro fundamentals On the macro side, some indicators have supported a view that the US Federal Reserve might postpone the beginning of the rising interest rate cycle. While the US economy is still in a good shape, two relevant indicators were weaker than expected. The advance estimate of the US GDP, released by the Bureau of Economic Analysis, showed a sluggish.2% s.a.a.r. in the Q1 215, far lower than the growth rate observed in the Q4 214 (2.2%) and the market consensus (1%). Besides, the US Labor Department reported an increase of 223, in the non-farm payroll for the month of April, following a revised 85, increase in March. Both came in below market expectations. When we analyze 12-month moving average, it looks payroll peaked in February and has slowed down since then, although stays above 2, monthly level. The other meaningful point is the trend observed in the price indices. Readings of the US consumer price index have slowed to % in the YoY comparison, well below the 2% targeted by the FED. Excluding food and energy, CPI has run close or below 2% target since Q The disinflationary energy price may contribute to keep a subdued core inflation, as cost of production will not be pressured. Moreover, the disinflationary/deflationary picture can be seen in many other economies as well, as a consequence of the collapse in the prices of relevant commodities, especially oil. 3

4 215-I (April 215) Chart 3. Consumer price index (selected countries) Consumer Price Index (% chg, YoY) US Consumer Price Index (% chg, YoY) 8,% 6,% 4,% 2,%,% -2,% -4,% 4,5% 4,% 3,5% 3,% 2,5% 2,% 1,5% 1,%,5%,% -,5% mai/9 jan/1 set/1 mai/11 jan/12 set/12 mai/13 jan/14 set/14 jan/1 set/1 mai/11 jan/12 set/12 mai/13 jan/14 set/14 USA China Japan EU All Items Core Source: BLS, ECB, BoJ, NBS Chart 4. US dollar index () & price of non-ferrous metals The Chinese GDP grew 7% YoY in the Q1 215, the slowest pace since 29. Beijing has announced some measures to stimulate the economy. PBoC slashed reserve requirement ratio from 19.5% to 18.5% and the benchmark lending interest rate was lowered from 5.35% p.a. to 5.1% p.a., the third cut in 6 months. Furthermore, PBoC has set its own quantitative easing. Banks will be allowed to access lending facilities with the Central Bank, using local government bonds as collateral a way to help local governments in rolling over debt. In a broad view, monetary policy stance has become more accommodative. It has not changed in the Euro region and in Japan. In China, it has been eased. And in the USA, Federal Reserve has suggested a less hawkish mode, increasing the likelihood of the rising interest rate cycle to start sometime between the end of this year and the beginning of the next. As a consequence, the US dollar index () has loosened track recently. We still believe strengthening cycle is not over and it will resume sometime in the near future. Nevertheless, since the and the price of base metals are negatively correlated, the recent weakness of the US dollar is supportive for the increase in the price of non-ferrous metals. 1 Price of Copper (Y) versus Dollar Index (X) 4. Price of Aluminium (Y) versus Dollar Index (X)

5 215-I (April 215) Price of Nickel (Y) versus Dollar Index (X) Price of Zinc (Y) versus Dollar Index (X) Given that, we expect the rebound in the price of non-ferrous metals to be sustained in the short term. Amongst the metals, we have been more bullish with zinc and aluminum. In the case of zinc, mines exhaustion will maintain some smelters short of zinc ore. For aluminum, energy costs in Brazil may keep production narrowing. In the rest of the world, subdued prices may not help the development of important projects. In the case of copper, market balance looks likely to turn more favorable for a price increase. Nevertheless, we do not expect further meaningful upside in the price. For nickel, we expect recent rally to fade, in spite of current prices hurting profitability of NPI producers in China, suggesting a decrease in the global supply - but demand has not been strong. In the case of iron ore, we expect price to stay between $5. to $55. range. Although largest miners to be prone to cut production, market balance will remain oversupplied, pushing prices below recently observed $6. level. Table 1. Price Forecast 5

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