monthly outlook: zinc and lead 5 may...

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MAN CORP S.A RESEARCH

Monthly Outlook: Zinc and Lead 5 May 2020 Market uncertainty points to bearish outlook

Technical analysis summary

Zinc LME Cash Daily

Price Trend Short term (1-3M):

Medium term (3-6M):

Long term (12M):

Resistances: R1: $1 903/t (20 DMA) R2: $1 918/t (40 DMA) R3: $2 067/t (26 Feb High) Support:

S1: $2 241 (200 DMA) S2: $2 119 (100 DMA) S3: $1 958 (Apr ‘16 High) Comments: Zinc currently has a slight disconnect between the concentrate and refined market, with units of concentrates becoming seemingly scarce given the rapid decline in TCs over the past few weeks. On the metal front, demand is dampened but we believe there is an expectation for Chinese smelters to move toward production cuts in the coming months. This will possibly bring some support to the LME Zinc price. Overall we do see more downside risk with support currently sitting around $1,840 per tonne.

Lead LME Cash Daily

Price Trend

Short term (1-3M):

Medium term (3-6M):

Long term (12M):

Resistances: R1: $1 750/t (Apr ’20 High) R2: $1 881/t (Mar ’20 High) R3: $2 038/t (CY ’20 High) Support: S1: $1 611.5/t (Apr ’20 Low) S2: $1 570/t (Mar ’20 Low) S3: $1 551.5/t (Nov ’16 Low) Comments: Similar to zinc, lead has seen tightening supplies on the concentrates front as logistical disruptions and shutdowns continue to affect raw material flows globally. That being said, the associated TC movement has been slightly more muted then that of the sister metal. We expect this to remain in the short term and for demand on the refined side to also remain low as we continue to see minimal demand from downstream markets, namely the automotive sector. We see lead for the short to mid-term sitting in the ranges of $1,565 and $1,675 per tonne. Source: LME, FastMarkets, MAN Corp S.A

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Monthly performance

Base Metals* Spot m/m Zinc

cash settlement 1 930 3.3% 3-months 1 936 3.0%

Copper cash settlement 5 231 9.0% 3-months 5 259 9.3%

Nickel cash settlement 12 134 8.0% 3-months 12 207 8.0%

Aluminium cash settlement 1 461 -1.9% 3-months 1 498 -1.7%

Lead cash settlement 1 610 -6.0% 3-months 1 637 -4.7%

Tin cash settlement 15 201 5.6% 3-months 15 017 4.6%

Zinc TC MB Index 188 -29% Lead TC MB Index 170 -13%

China Macro Latest Prev. Caixin PMI (Mar ‘20) 50.1 40.3 NBS PMI (Mar ‘20) 52.0 35.7

USDX Close 99.09 0.01% Source: Fast Markets | *LME mid-prices ($/tonne) Zinc and Lead TC prices as of 24 Apr 2020 Lead TC relates to High Silver All prices correct COB 30 April 2020

Bloomberg Industrial Metals SubIndex

Source: Bloomberg, MAN Corp S.A

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China outlook: riding the j-curve Chinese economic data for the first quarter of the year indicates a solid return to economic activity. Despite a continued fall in exports, the NBS PMI rose to 52.0 in Mar ‘20 vs 35.7 one month ago. This figure represents economic expansion and is well above economists’ forecast consensus of 45 compiled by Reuters. The NBS cautioned that this does not mean that China’s economic operation has returned to normal. Below our previous expectation of little to no growth, GDP data for Q1 ’20 yielded a contraction of 6.8% from a year ago, slightly exceeding the consensus estimate of a 6.5% decline. This contraction is the first since at least 1992, when official quarterly GDP recording began. Nearly all major industrial enterprises have resumed work, while official reports indicate that c.80% of smaller businesses have returned to work.

The Caixin PMI index also rose to 50.1 vs. 40.3 (Feb ’20). This index has recently been more optimistic than the NBS PMI index.

Caixin and NBS PMI NBS manufacturing sub-indices

Source: NBS, MAN Corp S.A Source: NBS, MAN Corp S.A

• NBS PMI sub-indices indicate that while domestic demand has been positive, external demand continues to face downward pressure as the global spread of the coronavirus has led to a drop in demand for Chinese exports. In our view, we will continue to see weakness in Chinese external demand throughout H1 ’20.

• According to the government’s survey, urban unemployment in March was 5.9% vs. 6.2% (Feb ’20). This is reflective of the improvement in the NBS index to 50.9 vs 31.8 (Feb ’20) The average value for this index 47.3 for CY ’19.

Chinese FAI, IP, retail sales and real estate investment (y/y %) Private vs public FAI (y/y %)


Fixed asset investment (FAI) for Mar ’20 declined 16.1% y/y, a significant improvement from the 24.5% decline seen last month. Retail sales growth declined by 15.8% y/y, quickly rebounding from the Jan-Feb decline of 20.5% y/y. With the support of government stimulus, Industrial production (IP) and Real estate investment declined by 1.1% and 7.7% marking an improvement from last month’s data. These sectors continue to benefit from growth in Total social financing (TSF) which surpassed its recent high of CNY 5.07trn in Jan ’20 to CNY 5.15trn in Mar ’20 (+74% y/y). In our view, economic stabilization is the most pressing/prioritized issue that Chinese officials are faced with.

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China average house prices for newly built homes (y/y %) Construction and real estate investment (y/y %)


Annual growth in house prices continued to slow since their most recent peak in May ’19 with average prices of new homes rising by 5.3% y/y in Mar ’20. While some local Chinese governments have eased certain ‘curbs’ on the property sector to help cash-strapped developers, the central government is keeping a close watch on the property market in order to prevent a bubble. Construction investment growth recovered marginally, declining by 64% y/y vs an 82.4% y/y decline one month ago. We continue to highlight China’s property market as one of the key risks set to worsen the global economic situation as Chinese developers hold significant offshore dollar denominated debt. Reportedly, property developers will likely be forced to refinance offshore borrowings domestically as funding conditions become tighter in the U.S while they loosen in China. This will lead to increased costs by way of foreign exchange and higher transaction costs. Positively, yields in China’s bond market are declining as authorities guide interest rates lower in addition to pumping liquidity into the economy.

Total social financing, cumulative y/y % (rhs) and 12-months rolling y/y % (rhs)

Source: NBS, MAN Corp S.A

China’s Total social financing (TSF) for Mar ’20 was CNY 5.15trn, this is a 74% y/y increase compared to Mar ’19. TSF for the first three months of the year totalled CNY 11.07trn vs CNY 8.61trn in Q1 ’19. In our view, the Chinese government will continue to provide stimulus to support the economy as it battles the impact of the coronavirus. As per our previous report, we believe the following to be high priority items with regards to stimulation and Chinese government intervention: • Continuance of the de-risking campaign initially announced in CY ’15; improvement on macro-prudential regulation; dismantling

of the shadow banking industry; stabilization of the real estate markets; clearance of hidden debt; and reformation of state-owned enterprises.

While government reporting and NBS data indicates that the Chinese economy is slowly returning to normalised levels, we reiterate our previous expectation of H1 ‘20 GDP coming in below 6% y/y with CY ’20 growth slowing to the range of 2-3%.

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Zinc: concentrate surplus followed by growing refined metal supply The covid-19 pandemic has brought the world’s largest economies to their knees and knocked almost $700/t off zinc’s prices between the $2 466/t January high and $1 774 March low. Refined zinc has continued on its longer downward trend with 30 Apr ‘20 LME cash mid-price at $1 929.5/t. According to CRU, refined zinc demand is facing the brunt of the coronavirus pandemics’ effects while returning supply will lead to surging refined surpluses leading to a cyclical downturn in pricing over the medium term.

Zinc LME price trend: Cash settlement mid-price ($) vs 3M mid-price ($) Jan ’18 to 30 Apr ‘ 20

Source: Fast Markets, MAN Corp S.A

We previously cited CRU’s findings of the zinc concentrate metals market switching from a deficit to a small surplus in Q4 ’19. This led to the expectation that with high smelter treatment charges (TCs) and average global capacity utilisation rates of 90%, the concentrate surplus will continue growing with refined stocks following the trend. With downward pressure on global demand and modest supply disruptions, we believe this surplus is set to arrive rapidly and cause a significant slump in zinc prices over the medium term. We highlight some of the following changes to our previous monthly note: • Refined zinc consumption for CY ’20 revised downward by c.800kt to c.13.1mt due to coronavirus effects on China’s Q1 ’20 and

ex-China’s expected Q2 ‘20 demand reduction. • Refined zinc production for CY ’20 revise downward by c.580k to c.13.7mt due to depressed zinc prices prompting small mines to

close alongside extended lockdowns causing supply disruptions in major zinc producing countries. • Revised global smelting capacity reducing our previous expectation of 15.8mt in CY ’22 to 15.6mt with global mine production

average growth of 2.5% for the next three years. Further supporting the notion of a market surplus is reporting from Financial Times indicating that China’s net imports of refined zinc declined by c.51% y/y to 68kt in Q1 ’20 compared to c.139kt during the same period last year. This is due to China’s increase in smelting capacity and relative increase in demand for raw materials (as opposed to refined metals). While Chinas recent PMI results indicate a turnaround, we maintain our view that the novel coronavirus will have significant effects on downstream consumption of galvanized steel. Accordingly, we believe zinc prices will remain depressed for the foreseeable future until significant mining cuts correct the market balance.

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Production and consumption outlook As previously mentioned, our adjusted refined zinc production and consumption of c.13.65mt and c.13.14mt indicate a market surplus of 500kt for CY ‘20f. This is a stark contrast to the past four years of market deficits with CY ’19 resulting in a deficit of 246kt. Considering mine production, we have reduced our expected zinc concentrate tonnage by c.1.5mtkt over the next three years. This adjusts the estimation of global mine production reaching 13.5mt by CY ’22 downward to c.13.3mt. Refined metal production and consumption for the same period are estimated at 14.2mt and 13.9mt respectively, indicating a 310kt surplus in CY ’22.

Refined zinc production vs consumption (mt) revised Mine production output (mt) revised

Source: CRU, MAN Corp S.A Source: CRU, MAN Corp S.A

Mine supply considerations According to CRU, Chinese mine supply will increase at an annual average of 2% p.a to reach 4.64mt in CY ’20, an increase of 433kt compared to CY ‘19. It is estimated that 112kt of production has been lost because of the coronavirus pandemic. As mentioned in our previous note, the majority of mine supply growth is expected ex-China with the caveat of reduced expectations as operations have been affected by varying degrees.

Mine output growth vs. smelter capacity growth (%) revised Global smelter capacity utilization (%) revised


Smelting capacity changes Revised figures of global smelting capacity have reduced our previous expectation of 15.8mt in CY ’22 to 15.6mt. While we still expect mine output growth to outpace smelting capacity growth, it is likely that a number of projects will be delayed due to lower demand and the expected build up in refined metal stocks. We highlight the following: • Global mine production average growth of 2.5% from CY ‘20f to CY ‘22f (China: 1%) vs global smelting capacity growth of 1.2%

p.a (China: 1.2%). • Ex-China smelting capacity of c.8.81mt for CY ’22 (vs. c.8.76 previously), which is c.328kt or 3.9% higher than CY ’19. • China smelting capacity of c.6.8mt for CY ’22 (vs. c.7mt previously), which is c.568kt or 3.8% higher than CY ’19.

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Chinas smelting capacity utilization of c.92% slightly exceeded the rest of the world (c.90%) in CY ’19. While we are experiencing downward pressure in TCs, we expect smelting capacity to remain in excess of 90% with revised figures indicating the following: • China average of 93% (previously 94%) and, • Ex-China average of 89% (previously 91%) over the next three years.

Global demand growth We have revised last months’ global refined metal supply/demand below to indicate a larger surplus of refined zinc from 300k to 500k in line with production and consumption expectations. We expect continued negative consumer sentiment reducing downstream demand for zinc metals. While we are seeing support for refined zinc in the form of Chinese government stimulus and state-subsidised stock piling, we continue to believe the ultimate driver of demand is on a global level and therefore do not expect any significant impact on prices until there is a turnaround in global economic activity.

Global refined metal supply/demand (mt) revised Global refined metal supply/demand comparison (mt)

Metal supply set to exceed demand over the next three years

Year Demand Supply Balance

2015 13.34 13.72 0.4

2016 13.63 13.55 -0.1

2017 13.86 13.45 -0.4

2018 13.85 13.30 -0.5

2019 13.77 13.53 -0.2

2020f 13.15 13.65 0.5


LME and SHFE warehouse trends

LME Zinc closing warehouse stocks (kt) to 30 Apr ‘20 SHFE Zinc warehouse stocks (kt) to 30 Apr ‘20

Source: Fast Markets, MAN Corp S.A Source: Fast Markets, MAN Corp S.A

LME Data SHFE Data 30 Apr ‘20 Tonnes % Change* 30 Apr ‘20 Tonnes % Change Closing stocks 97 425 Deliverable stocks 120 881

one week ago 99 475 -2.1% one week ago 133 349 -9.3%

one month ago 73 125 +33.2% one month ago 158 139 -23.6% On Warrant 88 225 On Warrant 56 305

one week ago 87 600 +0.7% one week ago 63 556 -11.4% one month ago 47 875 +84.3% one month ago 86 663 -35.0%

Cancelled Warrant 9 200 -22.5% Source: Fast Markets, MAN Corp S.A *w/w for Cancelled Warrant Source: Fast Markets, MAN Corp S.A

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Zinc refined metal market outlook: the traders corner Our view on zinc prices is based on technical analysis coupled with the short-term supply and demand balance.

Zinc LME cash ($/tonne) short-term price trend 06 Feb ’20 to 07 May ‘20f

Zinc LME 3M ($/tonne) short-term price trend 06 Feb ’20 to 07 May ‘20f


While we anticipate an uptick in demand during H2 ’20 on the assumption that significant progress will be made with the containment of the novel coronavirus allowing global economies to begin operating towards a normalised level, we believe that the medium term outlook for zinc remains negative as the market is headed for a significant surplus.

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Lead: modest oversupply set to increase Refined lead prices continue to face downward pressure with the LME cash mid-price declining by 5.96% to $1 610/t on 30 Apr. Over the last few weeks, the mid-price has traded within the range of $1 601/t to $1 698/t breaking the April ’20 support level of $1611.50/t. Recent data from the International Lead & Zinc Study Group (ILZSG) indicates that the refined lead market was in a 26.1k tonne surplus in February, largely due to the “pandemic-related disruption in China”. The Group states that China’s apparent demand dropped by 20.7% y/y although this was negated by a 22.5% decline in refined metal production caused by disruption to the lead-acid battery recycling supply chain. According to reporting from Financial Times, China’s net imports of refined lead collapsed to just 900 tonnes in Q1 ’20 from 48k tonnes during the same period last year. Notably, this was expected as markets were moving into a raw material surplus prior to the coronavirus pandemic following period of supply shortfall. This raw material surplus, considered alongside China’s increasing smelting capacity continues to provide downward pressure on refined lead imports. Current challenges facing the market include:

• a weak outlook of downstream demand driven by weak auto sector demand, • continued reliance on the Chinese economy, and • potential oversupply of both concentrates and refined lead towards the end of CY ’20.

Lead LME price trend: Cash settlement mid-price ($) vs 3M mid-price ($) Jan ’18 to 30 Apr ‘ 20

Source: Metal Bulletin, MAN Corp S.A

April Highlight: Evidence indicates that the refined lead market is shifting to short term tightness, with stock changes on the Shanghai Futures Exchange sliding to an 18-month low with of 7 986 tonnes as of 30 Apr ’20. We maintain our view that over the course of CY ‘20, refined lead demand will contract between c.1-3% causing a surplus for CY ’20. Accordingly, the lead market will experience a longer term swing from a deficit position towards a surplus for both refined metals and concentrates as mining operations return to normalised production levels.

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Lead demand outlook We maintain our view that the risk for lead metals is skewed to the downside in line with weak downstream demand. Last month we highlighted how S&P forecasts a 15% y/y decline in global light vehicle sales, citing the pandemic and weak global growth. This announcement was further supported by consultant LMC Automotive, who updated their projections with global light vehicle sales contracting by nearly c.14m vehicles, or 15% in CY ’20; and by potentially more than 20% to c.70m vehicles if the pandemic persists into the second half of the year.

March light vehicle sales comparison (million units) Global light vehicle sales (million units)

Source: LMC Automotive, MAN Corp S.A Source: LMC Automotive, S&P Forecast, MAN Corp S.A

According to LMC Automotive, global light vehicle sales contracted sharply in March, declining c.38% y/y to 5.5m units. The selling rate has declined to c.58m units/year with the average year-to-date selling rate declining 22.3% y/y. Global light vehicle sales for Q1 ’20 were c.17.1m units compared to c.22.5m for the same period last year. • China light vehicle sales for March ’20 were 1.3m units, declining by c.46% y/y. Total Chinese sales for Q1 ‘20 were c.3.5m

representing c.20% of global sales. • United States and Western Europe light vehicle sales for Mar ’20 were c.983k (-39% y/y) and c.884k (-53% y/y), respectively.

Combined, these two regions contributed c.39% of global sales. The China Association of Automobile Manufacturers (CAAM) reported that c.1.4m cars were produced in March ’20. This represents a 44.5% y/y decline in March with Q1 production declining by 45.2%. Sales of automobiles reportedly declined by 43.3% y/y to c.1.43m units. We expect continued pressure on U.S and European manufacturers as they battle with the economic implications of the coronavirus. We maintain our view of weak global demand encompassing the automotive sector, and therefore expect continued downward pressure on refined lead prices throughout H1 ’20. While there may be some positive short-term sentiment due to supply tightness in the Chinese markets, we believe this will quickly be dampened by increasing production as miners and smelters return to full operating capacity.

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Production and consumption outlook As previously mentioned, the global refined lead market continues to be in a small surplus similar to that of CY ’19. We highlight our previous expectations as follows: • Contraction in lead demand within the range of c.1-3% for CY ‘20 • Market surplus of 184kt for refined lead (vs c.55kt using ILZSG projections).

Refined lead production vs consumption (kt) Mine production output (kt)

Source: ILZSG, MAN Corp S.A Source: ILZSG, MAN Corp S.A

Mine supply and other market considerations According to Wood Mackenzie, roughly 50% of Chinese mines took an extended shutdown leading to a varied impact on mine supply. Some miners were reportedly considering postponing restarts until March. It is likely that the drawdown experienced on SHFE inventories absorbed the shock of reduced output. Chinese smelters reportedly carry enough concentrate for around 20-30 days of production.

Similar to Zinc smelters, primary lead smelters also face issues regarding constraints on acid storage that is likely to be further exacerbated by constraints on scrap and battery raw materials. Secondary lead smelters were greatly affected by limitations on movement of scrap batteries, the main feedstocks for lead recyclers.

China Lead Imports China’s refined metal imports have generally been on a downward trend as it continues to build out smelting capacity. The opposite applies to raw materials which have experienced increasing imports in recent history with lead concentrates increasing 37% y/y from CY ’18 to CY ’19. Refined lead imports for CY ’19 totalled 88.4kt, a 13% y/y decline compared to CY ’18.

According to the China General Administration of Customs, Chinese lead and ore concentrate imports for Q1 ’20 totalled c.265kt, representing a c.12% y/y decline compared to the same period last year. Positively, march imports show slight recovery with the narrowing of the year-on-year shortfall.

China’s metal stockpiling: As history shows, China is willing to support local industry by way of stockpiling in the face of subdued demand. The province of Yunnan is just one of the few that recently announced the creation of a fund to facilitate an 800kt stockpile of just about every industrial metal from aluminium to zinc. China’s Nonferrous Metals Industry Association (CNIA) reportedly called for a national stockpile program. We believe the State Reserves Bureau will step in and support the metals industry as it did in the financial crisis of 2008, the metals’ price weakness of 2012-13, and the cyclical demand trough of 2015-16.

10 600

10 800

11 000

11 200

11 400

11 600

11 800

12 000

2015 2016 2017 2018 2019 2020

Production (kt) Consumption (kt)

-4%-3%-3%-2%-2%-1%-1%0%1%1%2%

-

1 000

2 000

3 000

4 000

5 000

6 000

2015 2016 2017 2018 2019 2020

China ROW y/y (rhs)

China lead ores and concentrates imports (kt)

Source: China General Administration of Customs , MAN Corp S.A

-

50

100

150

200

250

Jan - Feb Mar Apr May Jun

2019 2020

of 12

LME and SHFE warehouse trends

LME Lead closing warehouse stocks (kt) to 30 Apr ‘20 SHFE Lead warehouse stocks (kt) to 30 Apr ‘20


LME Data SHFE Data 30 Apr ‘20 Tonnes % Change* 30 Apr ‘20 Tonnes % Change Closing stocks 73 400 Deliverable stocks 6 658

one week ago 73 200 +0.3% one week ago 7 074 -5.9%

one month ago 71 125 +3.2% one month ago 8 656 -23.1% On Warrant 70 325 On Warrant 4 949

one week ago 70 175 +0.2% one week ago 5 075 -2.5% one month ago 53 250 +32.1% one month ago 5 946 -16.8%

Cancelled Warrant 3 075 +1.7% Source: Fast Markets, MAN Corp S.A *w/w for Cancelled Warrant Source: Fast Markets, MAN Corp S.A

Lead market outlook: the traders corner Our view on lead prices is based on our outlook of the Chinese auto sector and short-term momentum related to refined metal supply tightness.

Lead LME cash ($/tonne) short-term price trend 06 Feb ’20 to 07 May ‘20f

Lead LME 3M ($/tonne) short-term price trend 06 Feb ’20 to 07 May ‘20f

Source: Metal Bulletin, MAN Corp S.A Source: Metal Bulletin, MAN Corp S.A

We forecast the following prices over the next three months:

We anticipate an uptick in demand during H2 ’20 as China comes out of the coronavirus pandemic effects. While this should provide support for Lead prices as it is supportive of the automotive sector and manufacturing of industrial products, we believe the expected market surplus of concentrate and refined lead (barring the short-term supply glut) will limit major price gains. Accordingly, this should result in more downside risk with lead prices trading sideways or trending towards their long term support around $1 500/t.

40

60

80

100

120

140

160

Jan '1

8

Apr '18

Jul '18

Oct '18

Jan '1

9

Apr '19

Jul '19

Oct '19

Jan '2

0

Apr '20

-

10

20

30

40

50

60

70

Jan '1

8

Apr '18

Jul '18

Oct '18

Jan '1

9

Apr '19

Jul '19

Oct '19

Jan '2

0

Apr '20

Chinese warehouse stocks have reached 18-year low as smelters draw down on lead concentrates....

-9%

-6%

-3%

0%

3%

6%

1 500

1 600

1 700

1 800

1 900

2 000

06-Fe

b-20

13-Fe

b-20

20-Fe

b-20

27-Fe

b-20

05-M

ar-20

12-M

ar-20

19-M

ar-20

26-M

ar-20

02-A

pr-20

09-A

pr-20

16-A

pr-20

23-A

pr-20

30-A

pr-20

07-M

ay-20

w/w (rhs) Cash mid-price ($/tonne)

-6%

-3%

0%

3%

1 500

1 600

1 700

1 800

1 900

2 000

06-Fe

b-20

13-Fe

b-20

20-Fe

b-20

27-Fe

b-20

05-M

ar-20

12-M

ar-20

19-M

ar-20

26-M

ar-20

02-A

pr-20

09-A

pr-20

16-A

pr-20

23-A

pr-20

30-A

pr-20

07-M

ay-20

w/w (rhs) 3M mid-price ($/tonne)

MAN Corp S.A

Rue Du Cendrier 15,

1201 Geneva, Switzerland

Contact: [email protected]

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monthly outlook: zinc and lead 5 may...

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