Want to Make Money in Industrial Metals Next Year? Ask China How

(Bloomberg) -- Base metals have been hot this year with zinc, copper and aluminum among the leaders, climbing between 15% and 23%. But what about 2018? Where would you invest to make money in industrial metals? 

China will have the answer. Its supply side discipline can make-or-break industrial metal sentiment for the next year, and will be the main focus for the market. Debates among analysts are heating up on copper and aluminum, while steel, coal and zinc are also creating buzz among the experts. Here are some takes on what analysts are expecting for 2018.

Goldman Sachs

• Bank expects outlook of strong growth in Emerging Markets and “soggy” dollar to favor metals markets. Goldman is most bullish on copper and most bearish on aluminum. Copper is "clearly" at the end of a supply boom, where aluminum has rising risk of a supply response, both inside and outside China.
• Goldman estimates the three-, six- and twelve-month copper price at $6,750, $6,900 and $7,050 per ton, respectively. Sees iron ore at $60, $55 and $50 per ton for same time period and aluminum unchanged at $2,000 through next twelve months.

Morgan Stanley

• Nickel and aluminium are top picks among base metals. China’s supply reform policies to benefit aluminium, while nickel "has plenty of room" to rise as its market tightens. Copper market is expected to be balanced in 2018 and likely to fall slightly versus current price.
• On the bearish calls, the bank thinks the zinc price is set to come under pressure by year-end 2018 on expanding supply. However, Morgan Stanley is most bearish on the bulk commodities. Expects iron ore and met coal prices to potentially weaken due to rising supply and declining steel demand as China’s infrastructure push slows down. Also thinks the battery metals, lithium and cobalt, will see rising supply, setting up lithium to fall.
• Hiked 2018 copper price estimate by 15 percent to $2.90 per pound and by 10 percent to $2.95 per pound for 2019. Raised average aluminum price forecast for 2018 to 2019 by 7 percent to $0.96 per pound and increased 2018-2019 average metallurgical coal, copper and zinc price forecasts by 2 percent, 13 percent and 10 percent, respectively.

Bloomberg Intelligence

• Refined-zinc market likely to tighten further in 2018, flip to a surplus in 2019 and then return to a deficit thereafter. Zinc concentrate market should gradually loosen over the next few years.
• Chinese supply-side reforms should keep coal, steel and aluminum prices higher for longer. Though China is backtracking on coal cuts, production increases won’t go far. Lower steel exports should sustain high global prices.
• The global copper market will be relatively balanced in 2018, but will turn to deficit in 2019 as required growth for primary refined metal outpaces the rate projected for mine supply.
• The recovery in global steelmakers’ shares since early 2016 may have more room to run, with bullish drivers likely to remain in place into 2018.

Royal Bank of Canada

• Valuations for base and diversified metal miners remains relatively attractive. The first quarter in 2018 could be volatile for the stocks due to Chinese winter, and copper could pull back to recent lows of about $2.90 per pound. But RBC recommends using such weakness to add to selected base metals and bulk commodities miners.
• RBC says its price forecasts for copper, zinc, coking coal and iron ore are above what other analysts are estimating for 2018
• Copper prices to average $3 per pound in 2018, but the bank thinks prices will rise through 2021 due to growing deficits and demand. Zinc prices will stay elevated for the next three to four years. Aluminum, on the other hand, is currently in its best fundamental position for years, and the market is still tightening. RBC also thinks prospect for nickel is "very interesting" on a 5-year basis due to rising electric vehicle demand, but the metal’s large inventories are a near-term headwind.

Citigroup

• Turning more cautious on mining stocks heading into 2018 on potential risks from a Chinese slowdown. Recommends investors be selective picking mining stocks due to "headline risks."
• Re-stocking of steel, iron ore in the first quarter of 2018 should generate typical seasonal rally, but beyond that, risk may grow for mining stocks. But some risks seem already priced-into the metals, especially within bulk commodities, which implies the correction would more likely be "a pullback versus a collapse."
• Bullish on stocks exposed to Chinese supply-side discipline, including U.S. steel mini-mills and Alcoa. Would also buy "growth stories" such as First Quantum, Nexa Resources; names Vale a top pick among large-cap miners. The bank is most cautious in near-term on copper prices and has a sell rating on Southern Copper.

BofA Merrill Lynch

• Demand for base metals remains supportive for 2018, but unlikely to be as bullish as 2016 or 2017. Sees nickel benefiting from the global electric vehicle push, while favoring aluminum amid China’s show of supply discipline.
• Raises 2018 average aluminum price to $1.08 per pound from $0.94. Copper’s 2018 price raised to $2.96 per pound from $2.84 on lack of supply, but slowing Chinese demand growth may cap upside. Supply cuts help uranium’s outlook for 2018, but still sees growing surpluses beyond 2019.
• Metallurgical coal expected to find a bottom around $140 per ton and iron ore market to remain relatively tight in 2018, with average price of $65 a ton.

KeyBanc

• Investors should be selective when picking steel stocks due to valuation. Chinese supply discipline, steel pricing and/or U.S. fiscal policy momentum will be key driver.
• Steel Dynamics, with overweight recommendation and TimkenSteel at underweight are "key ideas" for 2018

Macquarie

• Copper mine output data revealed a strong recovery in last 2 quarters since the "highly disrupted" first quarter. But a number of disruptive incidents and weaker guidance have driven the bank to cutting its 2018 copper supply estimates, so that the surplus that was previously expected is now gone
• Expects a small oversupply of cathode, and a concentrates deficit of ~100k ton

To contact the reporter on this story: Aoyon Ashraf in Toronto at aashraf7@bloomberg.net.

To contact the editors responsible for this story: Arie Shapira at ashapira3@bloomberg.net, Scott Schnipper

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