Metals: more fuel left in Trumpflation

Macro outlook

Demand for base metals has received a healthy boost since the end of last year from

expectations of rising infrastructure spending in the US and rising activity in the global
manufacturing sector. Although the market looks to be pricing higher demand in the US
from higher infrastructure spending, the implementation lag is likely to be fairly long and
we may very well have to look to 2018 before actual investment activity and base metal
consumption is seen. Growth in the global economy should continue to progress next year
and support base metal demand, but start to level off in 2018.

Upstream supply to the world base metals market is beginning to feel the effects of the
ongoing consolidation in the mining sector. In particular production of nickel ore and zinc
ore has begun to trend lower. The same signs are beginning to show in bauxite production,
while production of copper ore is still trending higher. Downstream refinery production is
experiencing the same pattern of development. With base metal prices still at low levels
the consolidation is set to continue in 2017 before coming to an end in 2018, where the rise
in demand next year should start to have a positive impact on new investments.

Price outlook

We look for the recent sharp rally in base metal prices to ease this year. In the near-term,
the market will probably stay sensitive to news on the plans for fiscal spending on
infrastructure and defence in the US. In general, we look for prices to trend higher in 2017
and 2018 on further supply consolidation and higher demand growth. We forecast the price
for LME aluminium 3M will average USD1,770/MT in 2017 (revised up from
USD1,765/MT) and USD1,805/MT in 2018 (unchanged), the price for LME copper 3M
will average USD5,925/MT (unchanged) and USD6,063/MT respectively (unchanged), the
price for LME nickel 3M to average USD11,100/MT (revised down from USD11,350/MT)
and USD11,750/MT (unchanged) respectively and the price for LME zinc 3M to average
USD2,375/MT (revised up from USD2,275/MT) and USD2,263/MT (unchanged),
respectively. We only made small adjustments to forecasts for Q1 and Q2 17, while the
remaining forecasts are unchanged.

The PBOC’s intervention in the FX market to support the CNY was an important source of
downward pressure on base metal prices in 2015 and in January 2016. Chinese money
market rates rose again around New Year as capital outflow picked up pace. Spill over to
the base metals market was limited though. While this remains an important downside risk
factor to watch for base metal prices, the risk that the PBOC will be forced to intervene to
support the CNY should be limited as it has started to target a stable CNY against a basket
of currencies rather than the USD. If the markets start to price in a Federal Reserve rate
hike in March or an end to re-investments of the Federal Reserve’s bond portfolio, it could

impact this development and thus affect base metal prices negatively

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