TORONTO (miningweekly.com) – In the wake of lacklustre discipline by producers to curtail output in the face of relentless price declines, Bank of America Merrill Lynch (BofAML) Global Research is concerned that another leg of lower prices may be required to incentivise another round of cuts for a range of materials.

In its Metals Strategist publication, 'Metals Sunrise', published on Tuesday, analysts warned that an overarching theme for 2016 was going to be that manufacturing activity in China and the rest of the world continued to face headwinds, impacting negatively on commodity demand.

BofAML stated that China’s economic activity might not improve until the second half of the year.

“In an ideal scenario, miners would curtail production during the first six months of next year before growth accelerates in the latter part of 2016,” the financial firm forecast.

Monetary policy differentials were also set to increase, which could forebode a stronger greenback into next year, while inflation globally was set to remain passive. Ironically, analysts advised that both of these dynamics could increase headwinds to the mined commodities into 2016, yet, the Federal Reserve might slow the tightening of monetary policy, while the global economy could start reflating in the second half, which might support raw materials.

BofAML noted that purely supply-led rallies were rare and, with manufacturing activity remaining globally challenged, it was prompted to believe that base metals could decline further into 2016.

PRICE ADJUSTMENTS
“Influenced by these headwinds, we have lowered our price forecasts for many industrial commodities. Yet, these lower prices come with a silver lining: if marginal and high-cost production is being shuttered, in reaction to the challenging operating environment, and global growth reaccelerates, we believe the base metals could bottom and rally meaningfully into [the second half of the year],” stated BofAML Global Research metals strategist Michael Widmer.

For copper, this might lead to another round of cutbacks, which, together with a rebound in economic activity, could push prices higher in the second half of the year. For this reason, BofAML expected copper prices to grow half-a-per-cent to $4 537/t this year, adding 5.5% to $4 747/t in 2017.

Zinc had the strongest fundamentals in the analysts’ view, with a current concentrates deficit of 800 000 t, so it was likely that this commodity would remain an outperformer. However, the banking group revised its 2016 price outlook down 4.7% to $2 050/t and expected a 0.1% price contraction in 2017 to $2 273/t from previous forecasts.

Further, the window of opportunity for nickel was closing in BofAML’s view and the group did not expect any further deficits unless more cutbacks materialised. It expected 2016 prices to deteriorate by 39.3% to $8 504/t, while it revised its 2017 price expectation down 5.5% to $10 750/t.

Aluminium remained challenged unless Chinese smelters curtailed output, which was a distinct possibility, said BofAML. It revised down its 2016 price outlook by 9.1% to $1 603/t for the metal, while its 2017 forecast of $1 764/t remained unaltered.

Meanwhile, BofAML had recently lowered its view on gold into the Fed hiking cycle and reinforced its expectation that rising nominal rates, combined with low or falling inflation rates, would pressure the metal lower. Yet, scope for global reflation in the second half of the year and/or a slower Fed hiking cycle, could bring about a turning point for the metal. It kept its gold price outlook stable at $1 088/oz for 2016, and $1 213/oz for 2017.

Platinum had been impacted by subdued Chinese and European purchases and an increase in buying from these regions might help a bottoming out, advised BofAML. The group’s platinum price assumption was downgraded by 18.2% to $900/oz this year, and it lowered 2017 forecast prices by 8% to $1 150/oz.

Further, BofAML noted that China’s steel exports had been high in 2015, though the ‘relief valve’ was closing as governments in the rest of the world took protectionist antidumping measures. Together with weak economic growth, this would likely impact Chinese mills and their demand for raw materials.

“We expect iron-ore to average $45/t in 2016, with scope for a dip into the $30/t. Longer-term, prices will likely be capped at $55/t as demand in China matures and plentiful supply of low-cost brownfield tonnes remain an overhang,” analysts advised.

Thermal coal was also expected to remain challenged as Indian demand was unlikely to fully offset falling Chinese imports. BofAML downgraded its price expectations for all coal commodities for 2016 and 2017.

Meanwhile, the uranium market was expected to likely remain oversupplied until 2020 owing to a confluence of factors. BofAML expected uranium prices to dip 11% lower than previously expected this year to $39/lb, while spot prices were expected to fare 27.3% worse than previously thought to average around $40/lb.

Manganese headwinds would likely persist into 2016 on high Chinese port stocks and lack of supply cuts.

Molybdenum oversupplies persisted, capping price growth. For this reason, BofAML expected molybdenum prices to be 37.5% lower this year at $5/lb, and 25% lower than previously estimated for 2017 at $6/lb.