Published on March 4, 2014
SPECIAL MONTHLY REPORT ON Base Metals (March 2014) ®
® March 2014 BASE METALS PERFORMANCE (31st January 2014 - 28th February 2014) (% change) Nickel 5.29 3.13 -1.43 Lead 0.99 -0.94 -2.05 Aluminium 2.81 1.23 0.44 Zinc 5.12 3.96 -3.63 Copper BASE METALS -6.00 -0.78 -1.07 -4.00 -2.00 SHFE 0.00 LME 2.00 MCX 4.00 6.00 Source: Reuters & SMC 2
® March 2014 HOT PICK FOR THE MONTH Nickel (April) (MCX) Recommendation Investors are advised to take long term fundamental buy position in Nickel (April) at current levels for the target of 980 with stop loss of closing below 901. Note: These long term fundamental calls are for duration of three to four weeks time frame and do not confuse these with intraday calls. 3
® March 2014 COPPER Copper prices traded in thin range in February 2014 as fed tapering concerns and slowdown in Chinese economy pushed the prices lower but strong china imports capped the downside. Overall copper traded in range of 440-453 in MCX in the month of February. According to International Copper Study Group “The global copper market deficit widened to 129,000 tonnes in November, mostly due to demand for refined copper from top consumer China”. Slow PMI data have exerted pressure on the copper prices. Chinese manufacturing index recently by HSBC Holdings Plc and Markit Economics fell to the lowest level in seven months as the nation accounts for about 45 percent of global copper consumption. Copper prices can move in range of 330-370 in the month of March. China Copper Product Imports Mark Record Rise In January 2014 China reported a record increase in Copper products imports on a monthly basis in January. The imports of unwrought Copper increased by 53% to 536000 tonnes in January 2014 compared to 350968 tonnes in January 2013. However, on a monthly basis the imports of Copper ticked up by 21.5% to from 441291 tonnes. COPPER China PMI came below estimates A gauge of Chinese manufacturing fell in February to an eight-month low of 50.2, a government report showed on March 1, while a private index released today from HSBC Holdings Plc and Markit Economics fell to 48.5 this month from 49.5 for January. A number above 50 signals expansion. Copper In A Production Deficit of 23000 Tonnes In January-October 2013: ICSG The report from International Copper Study Group (ICSG) showed that the Copper markets were in production deficit of 230000 tonnes in JanuaryOctober 2013. After making seasonal adjustment the production deficit was 169000 tonnes. Meanwhile for October 2013, Copper markets were in deficit of 19000 tonnes. Taking into consideration seasonal adjustments the production deficit was 62000 tonnes. Recovery in the production levels resulted in the rise of mine production by 8.4% or 1.14 million tonnes. The mine production in January-October 2013 period was 17.56 million tonnes, compared to 16.82 million tonnes in January-October 2012. Mine production increased by around 7% in Chile or 300000 tonnes, and accounted for 32% of world mine production. Production also increased in Peru by 6%, while in United States it increased by 8%, Indonesia by 22%, Democratic Republic of Congo by 49% and Zambia by 12% among others. On a regional basis, production rose by around 27% in Africa, 7% in the Americas, 10% in Asia, 2% in Europe, and 5% in Oceania. The average world mine capacity utilization rate for the first 10 months of 2013 increased to around 84% from around 81% in the same period of 2012. Trafigura to buy 30 pct of Jinchuan copper smelter in China Global commodity trader Trafigura said it would buy 30 percent of Jinchuan Group's copper smelter in southern China, the first time a foreign firm has taken a major stake in such a facility in the world's top consumer of refined copper. In the month of March 2014 copper prices may trade on volatile path as movement of various economic indicators such as PMI data, homes sales and employment data along with fed tapering and Chinese demand will give further direction to the copper prices. Range Copper MCX: Rs 430-470 per kg LME: $6900-7180 per tonne 4
® COPPER March 2014 Source: Kitco metals 5
® March 2014 NICKEL Nickel prices shown positive gains in the month of February due to the ore ban by Indonesia. After all, the January halt to flows of nickel ore to China's giant nickel pig iron (NPI) sector puts at risk an estimated 482,000 tonnes, or around 25 percent of global supply. Overall nickel traded in range of 861917 in MCX. Nickel prices are getting the support from the speculation that a global surplus will shrink amid a ban on exports of unprocessed ore in Indonesia and as U.S. manufacturing beat estimates. Chinese government agencies and domestic producers met last week to consider ways to counter the impact of the Jan. 12 ban, which is choking off supply to its nickel pig iron smelters. Nickel prices can move in range of 840-970 in the month of March. Nickel demand and supply analysis Fundamentally nickel demand continues to lag supply. China was the major contributor for increase in the demand of refined nickel. The major global manufacturing hubs including the US and Germany saw a decrease in demand for the metal by 5% and 19% respectively last year. Europe cumulatively saw a decrease in demand by 10%. INSG estimates Producers ramping up production Rather than trimming production, nickel producers are still ramping up new projects, many of which were given the green light six years ago when the nickel price surged to $50,000 per tonne. Glencore, for example, is currently bringing on line its 60,000-tonne per year Koniambo ferronickel project in New Caledonia. The first line came on stream last year, producing 1,400 tonnes of metal, with first ore to the second line due this quarter. Vale is also lifting production at its Onca Puma operations in Brazil after a one-year suspension of the new project due to furnace blow-outs. By December the plant was running at around 62 percent of its nominal capacity of 25,000 tonnes per year (basis single furnace operation). Then there are the high-pressure-acid-leach projects (HPAL), several of which have experienced technical delays but most of which are now also accelerating run rates. First Quantum's Ravensthorpe mine produced 29,000 tonnes of nickel in hydroxide last year, the best performance since operations began in 2011. Guidance for this year is 33,000-37,000 tonnes, at or close to effective capacity. The Ramu project in Papua New Guinea uses the same production template as Ravensthorpe, producing a mixed hydroxide that requires further refining. NICKEL Global refined nickel supply still surged by almost 11 percent last year to 1,944,700 tonnes, tipping the market into 173,000-tonne surplus, according to the latest assessment by the International Nickel Study Group (INSG). 6
® March 2014 In the month of March 2014 Nickel trend will depend on the stainless steel sector demand along with availability of Nickel ore. Movement of local currency is likely to influence its prices on domestic bourses. Range Nickel MCX: Rs 840-980 per kg LME: $14300-15300 per tonne NICKEL Source Kitco metals 7
® March 2014 LEAD Lead prices traded on mixed path in the month of February 2014.Overall its prices moved in range of 129.80-135.65 in MCX. Growing demand from replacement battery sector supported the prices but lower than expected China PMI figures capped the upside. Fed tapering concerns capped the upside while increase in cancelled warrants supported the prices. The Fed lowered its monthly bond purchases by $10 billion at the January meeting to $65 billion, matching a December reduction. In the month of February Lead prices may remain sideways with positive bias. This month FOMC meeting on 18-19 March will be closely watched by investors for further direction. Overall lead prices can move in range of 126-138. ILZSG latest Lead estimates Global lead mine production increased by 6.4 percent compared to 2012 mainly as a result of higher output in China and Australia, where Ivernia's Paroo Station (formerly Magellan) mine reopened in March. LEAD & ZINC rise in world output of refined lead metal of A 3.7 percent was primarily a consequence of higher production in China, Italy, Peru and the United States. Production from secondary (recycled) raw materials accounted for 54.7 percent of total output compared to 55.6 percent in 2012. Overall global demand for refined lead metal increased by 4.5 percent. This was principally driven by rises in usage of 16 percent in the United States, 4.9 percent in China 3.5 percent in Europe and 11.5 percent in the republic of Korea that more than offset contractions in India, Japan and Mexico. Chinese imports of lead contained in lead concentrates declined by 18 percent to 822kt from the record levels attained in 2012. Cash Settlement and Forward Three Month Prices on the LME averaged US$2141 and US$$2157 respectively during 2013, 3.9 percent and 4 percent higher than during 2012. The highest Cash Settlement Price of US$2448 was recorded on 5 February and the lowest of US$1949 on 15 May. Indian Lead Scenario Lead which is a byproduct of zinc majorly is being imported. 1/3rd of the lead production in India comes from primary sources like mining and the balance from the secondary sources mainly re cycling. India lacks lead ore reserves and hence it necessitates large scale imports and secondary sources such as recycling. Lead is amongst the most recycled non-ferrous metal. The main input from lead recycling comes from lead acid battery scrap which is a hazardous material. The only primary lead smelter is Hindustan Zinc of the Vedanta Group which contributes to 16% of the total supply in the country while the secondary smelters contribute 22% of lead supply, approximately 30% of supply is contributed by the unorganized sector and the balance is met by imports. The estimated demand of lead is 500,000 tonnes. The demand is expected to grow at a rate of 6% which is being driven due to demand for automobile batteries and invertors and UPS application In India, the Lead & Zinc industry is characterized as a duopolistic industry with Hindustan Zinc Ltd. (HZL) and Binani Zinc Ltd. (BZL) being the only two players involved in primary metal production. The Gravita Group established in the year 1992 and has manufacturing set up at Jaipur. Company has engaged in the business of manufacturing of Lead Metal by Recycling & Smelting process & other lead products. Replacement battery continues to be demand driver for Lead The principal consumption of lead is in making of leadacid batteries which used by automobile original equipment manufacturers industry, and industrial and inverter segment. With automotive OEM(Original equipment manufacturer) demand to remain flattish due to economic slowdown impacting decline in automotive production, the replacement battery demand expected to grow in double digit (11-13% CAGR) over the next two years on general assumption that average life of automotive battery around 36-months and as strong growth in the original equipment manufacturer (OEM) during FY10-FY12 period. The auto industry sales grew 14% and 27% in FY2012 and FY2011 respectively. 8
® March 2014 LEAD & ZINC Source-ILZSG Lead demand exceeds supply in 2013 Lead demand-supply scenario Production/Consumption(In000Tonnes) 2007 2008 2009 2010 2011 2012 2013 Mine Production 11201 11881 11623 12390 12666 13149 13286 6.1 -2.2 6.6 2.2 3.8 1.0 11774 11281 12896 13080 12526 13138 3.8 -4.2 14.3 1.4 -4.2 4.9 11574 10915 12649 12706 12290 13198 3.1 -5.7 15.9 0.5 -3.3 7.4 200 366 247 374 236 -60 YoY % Metal Production 11345 YoY % Metal usage 11229 YoY % Demand-Supply balance 116 Source-ILZSG 9
® March 2014 Lead consumption grew by 4.5% in 2013 driven by Chinese and US demand Refined Lead consumption 2009 2010 2011 2012 2013 Change 2013-2012 Europe 1503 1642 1631 1622 1678 56 3.50% United States 1397 1441 1538 1499 1739 240 16.00% China 3925 4171 4588 4245 4452 207 4.90% India 415 433 445 521 493 -28 -5.40% Japan 189 224 236 273 258 -15 -5.50% Korea, Rep. 360 385 420 428 478 49 11.50% Other Countries 1456 1520 1586 1566 1518 -48 -3.10% World Total 9245 9815 10444 10154 10615 461 4.50% China as a % of total 42.5 42.5 43.9 41.8 41.9 Source-ILZSG LEAD & ZINC Lead and Zinc spread Source: Reuters Analysis Lead and Zinc spread continued to narrow down from high of nearly 9 in January 2014 to below 1 in the month of February .This spread can move in range of 0 to 6 in March 2014. 10
® March 2014 ZINC Zinc prices appreciated in the month of February as tight supplies and firm spot demand lifted its prices. Prices moved in range of 121.90-131 in MCX. Renewed galvanizing demand has supported the prices but slow Chinese growth and manufacturing data capped the upside. Mixed movement may persist in the month of March as slow China PMI figures may cap the upside but supply tightness may give support to the prices. ILSG Zinc forecast Global demand for refined zinc metal exceeded supply by 2,000 mt in the first 10 months of 2013. 7% yearon-year increase in global usage of refined zinc metal to 10.94 million mt for January-October 2013 "was primarily influenced by a rise in Chinese apparent demand of 12.9% as well as increases in India, Thailand, Turkey and the United States adding that in Europe, demand remained at the same level as in 2012. Zinc demand exceeds supply in 2013 Zinc demand-supply scenario Production/Consumption(In000tonnes) 2007 2008 2009 2010 2011 2012 2013 Mine Production 3657 3812 3810 4161 4636 4994 5313 4.2 -0.1 9.2 11.4 7.7 6.4 9230 9242 9850 10598 10212 10593 9.7 0.1 6.6 7.6 -3.6 3.7 9222 9242 9815 10444 10154 10615 9.5 0.2 6.2 6.4 -2.8 4.5 8 0 35 154 58 -22 YoY % Metal Production 8413 YoY % Metal usage 8421 YoY % Demand-Supply balance -8 Source-ILZSG LEAD & ZINC Zinc consumption grew by 7.4% in 2013 driven by Chinese and Indian demand (in 000 tonnes) Refined Zinc consumption 2009 2010 2011 2012 2013 Europe 1939 2488 2513 2355 2366 11 0.5% United States 912 891 928 904 946 41 4.6% 4659 5403 5458 5233 5950 717 13.7% China Change 2013-2012 India 539 579 513 586 658 72 12.2% Japan 433 516 501 479 503 23 4.9% Korea, Rep. 493 538 545 561 577 16 2.9% Other Countries 1939 2233 2247 2172 2200 28 1.3% World Total 10915 12649 12706 12290 13198 909 7.4% 42.7 42.7 43.0 42.6 45.1 China as a % of total Source-ILZSG Zinc Mining closure to support the prices Zinc mines, with an estimated 1.3MT of production (~10% of CY13 consumption), are expected to get depleted over the next two-to-three years, leading to a tight supply situation in the refined zinc market Mining companies are shutting down key zinc- output facilities in Canada and Australia, because reserves in those mines have largely been depleted. Glencore Xstrata PLC's Brunswick and Perseverance mines in eastern Canada, which had combined capacity of 400,000 tons of zinc, closed in 2013. And output from MMG Ltd. Century mine in Australia's 11
® March 2014 Queensland State is slowing as the world's thirdbiggest open-pit zinc mine is slated for closure by 2016. they expect its new Perkoa mine in Burkina Faso to produce 90,000 tons of zinc next year. Output at Hudbay Minerals' Lalor Lake mine in Manitoba province, Canada, is forecast at 40,000 tons in 2014. New mining projects for zinc aren't as large as those that recently closed. Glencore officials have said Zinc mines planned for closure leading to 1.3 MT decline in global supply Mine Company Production 000' tonne Closure year Country/region Brunswick Glencore Xstrata 265 2013 Canada Perseverance Glencore Xstrata 135 2013 Canada Lisheen Vedanta 175 2014 Ireland Century MMG 488 2015 Australia Skorpion Vedanta 171 2016 Namibia Black Mountain Vedanta 37 2016 Namibia Total 1271 Source-ILZSG LEAD & ZINC Indian Zinc Scenario The domestic zinc industry has recently transitioned into a state of self-sufficiency on account of expansions in the mining and smelting operations, respective scenario in lead still remains a concern as the demand far exceeds domestic production of the metal, though there have been recent increases in capacity and production. All major zinc ore mines in India viz. Rampura Agucha, Rajpura Dariba and Zawar mines are located in the state of Rajasthan and all of these are under the control of Hindustan Zinc. Indian Government expects zinc demand to exceed 8.8 lakh tonne by 2016-17 As per Government of India report of working group on mineral exploration and development for 12th Five Year plan, the Zinc demand in India is expected to remain strong in the coming years on account of growth in the key zinc consuming industries like infrastructure, realty and manufacturing. Moreover due to the growth in automobile and consumer durables industry would also further aid the increase in consumption of zinc Demand for zinc in India is expecting from 6,00,000 lakh tonne in 2012-13 to 8,80,000 tonne in 201617.Considering continuous supply of 20,000tonne from secondary route and 50,000 tonne from imports in every year about 9 lakh tonne production are projected with marginal increase from 2012-13 to 2015-16. This production projections are given is in correlation with gradual reduction of exports with reference to domestic consumption. The current zinc production capacity of HZL is 9,17,000 tonnes. In March 2014, Zinc and Lead prices will depend upon automobile, construction and infrastructure demand .Moreover FOMC meeting on 18-19 March will give further direction to its prices. Range Lead MCX: Rs 126-138 per kg LME: $2050-2250 per tonne Zinc MCX: Rs 122-133 per kg LME: $1980-2220 per tonne 12
® LEAD & ZINC March 2014 Source Kitco metals Source Kitco metals 13
® March 2014 ALUMINUM White metal Aluminum moved on extremely volatile path in month of February on mixed fundamentals. Feeble spot demand and slowdown in China kept the prices under selling pressure. But increased spot market premium may give support to the prices. Overall it moved in range of 105.10110.20. With production trailing consumption, stocks are beginning to be drawn down, and market balances are tightening. There is a swing in ex-China balance to deficit this year (estimated at 1.3 million tonnes). Yet, excess capacity in China continues to weigh on the market. In the month of March its prices may remain sideways with some short covering can be seen at lower levels as demand from packaging, aerospace, automobiles, construction and power, amongst other sectors demand will give further direction. Aluminum prices can hover in range of 103-112 in the month of March. Major Aluminum producer Rusal expects the Aluminum premiums might rise further by 50% and estimates that the further new supply of aluminum which would increase in the wake of new LME warehouse rules might move get shifted off exchange there by creating supply tightness in the commodity. Chinese aluminium producers have the option of replacing lost Indonesian bauxite with the intermediate product alumina. Imports of alumina stood at 642,000 tonnes in January were the highest monthly total since May 2012. The world aluminium market is struggling to come to terms with, on the one hand, a structural shift from surplus to deficit exceeding one million tonnes expected this year and the next; and on the other, freeing up of up to 1.4 million tonnes of the metal over the next two years following changes to LME warehouse rules. According to industry experts, planned aluminium production cuts have soared since the announcement of the new LME warehousing policy which will eventually reduce smelter profits via lower physical premiums. ALUMINUM Aluminium swings from surplus to deficit After seven-eight years of acute oversupply, the world aluminium market is now undergoing a structural change from surplus to deficit. An extended period of overcapacity has been a feature of the world aluminium market for some time now. No doubt, producers in the western world have cut back output but their efforts have been largely neutralised by new capacity additions in China and West Asia. The result has been sustained downward pressure on aluminium prices. No wonder, LME prices have continued to remain in a narrow range of $1,700-1,900 a tonne. With long waiting time or queue at LME warehouses, producers were compensated, albeit partially, by the rise in aluminium premiums; but that too is beginning to decline with the LME proposing new rules of warehousing and delivery scheduled to take effect from April 1, 2014. Production cuts ex-China have totalled close to 2.4 million tonnes a year of capacity since the beginning of 2012, leading to a sharp change in the market balance from surplus to deficit. Demand prospects for Aluminum From the demand side, global demand growth is expected to be strong in the next two years (4-5 per cent) thanks to continued growth in BRIC countries and a rebound in G3 demand. Leading indicators and improvement in global manufacturing confidence support the expectation. The US is expected to see demand growth of about 3 per cent per annum, while Europe could be something of a wild card because with fiscal austerity less of an issue now, it is possible that European demand may bounce if households and corporates begin to replace durable goods, such as vehicles, and plant and machinery. The US Fed tapering and anticipated dollar firmness is likely to pressure metal prices. 14
® March 2014 Range Aluminum MCX: Rs 103-112 per kg LME: $1640-1850per tonne ALUMINUM In March 2014 aluminum prices are expected to trade on volatile path as demand from auto and construction sector is likely to support the prices while oversupply concerns can cap the upside. Source Kitco metals 15
® March 2014 KEY US ECONOMIC INDICATOR Some Key US Economic indicator charts 16
KEY US ECONOMIC INDICATOR ® March 2014 17
® March 2014 Your valuable feedback will be appreciated For further queries Pls. Contact Sandeep Joon Phone E-mail Senior Research Analyst 011-30111000 Extn - 683 firstname.lastname@example.org Supportive team Pramod Chhimwal Graphic Designer SMC Global Securities Limited is proposing, subject to receipt of requisite approvals, market conditions and other considerations, a further public issue of its equity shares and has filed a Draft Red Herring Prospectus (DRHP) with the Securities and Exchange Board of India (SEBI). The DRHP is available on the website of the SEBI at www.sebi.gov.in and the website of the Book Running Lead Managers i.e. Tata Securities Limited at www.tatacapital.com and IL&FS Capital Advisors Limited at www.ilfscapital.com. Investors should note that investment in equity shares involves a high degree of risk. For details please refer to the DRHP and particularly the section titled Risk Factors in the Draft Red Herring Prospectus. Disclaimer: This report is for the personal information of the authorized recipient and doesn't construe to be any investment, legal or taxation advice to you. It is only for private circulation and use .The report is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon as such. No action is solicited on the basis of the contents of the report. The report should not be reproduced or redistributed to any other person(s)in any form without prior written permission of the SMC. The contents of this material are general and are neither comprehensive nor inclusive. Neither SMC nor any of its affiliates, associates, representatives, directors or employees shall be responsible for any loss or damage that may arise to any person due to any action taken on the basis of this report. It does not constitute personal recommendations or take into account the particular investment objectives, financial situations or needs of an individual client or a corporate/s or any entity/s. All investments involve risk and past performance doesn't guarantee future results. The value of, and income from investments may vary because of the changes in the macro and micro factors given at a certain period of time. The person should use his/her own judgment while taking investment decisions. Please note that we and our affiliates, officers, directors, and employees, including persons involved in the preparation or issuance if this material;(a) from time to time, may have long or short positions in, and buy or sell the commodities thereof, mentioned here in or (b) be engaged in any other transaction involving such commodities and earn brokerage or other compensation or act as a market maker in the commodities discussed herein (c) may have any other potential conflict of interest with respect to any recommendation and related information and opinions. All disputes shall be subject to the exclusive jurisdiction of Delhi High court.
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