Base Metals Outlook · Base Metals Outlook Bridging the gap 3 Copper 5 Aluminium 9 Nickel 13 Zinc 17 Lead 21 2 Strategy This is a marketing communication which has been prepared by

www.icbcstandard.com Private and confidential

Base Metals Outlook

Bridging the gap

August, 2018

ICBC Standard Bank |

Contents

Base Metals Outlook

Bridging the gap 3

Copper 5

Aluminium 9

Nickel 13

Zinc 17

Lead 21

2

Commodities Strategy

This is a marketing communication which has been prepared by a trader, sales person or analyst of ICBC Standard Bank Plc, or its affiliates (“ICBCS”) and is provided for informational purposes only. The material does not constitute, nor should it be regarded as, investment research. It has not been prepared in accordance with the full legal requirements designed to promote independence of research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

1

Overview:

Bridging the gap


US$/t

LME 3M 2015 2016 2017 1Q18 2Q18 3Q18 4Q18 2018 2019 2020

Al 1,681 1,611 1,980 2,160 2,262 2,100 2,175 2,174 2,250 2,300

previous 2,300 2,200 2,250 2,228 2,250 2,300

Cu 5,493 4,870 6,197 6,997 6,904 6,200 6,500 6,650 7,000 7,500

previous 6,900 6,750 6,900 6,887 7,250 7,750

Pb 1,794 1,875 2,324 2,517 2,392 2,150 2,325 2,346 2,300 2,200

previous 2,400 2,300 2,300 2,379 2,250 2,200

Ni 11,877 9,648 10,459 13,319 14,540 14,000 14,500 14,090 15,000 16,000

previous 14,500 14,750 14,750 14,330 15,000 16,000

Zn 1,938 2,101 2,888 3,390 3,104 2,550 2,750 2,948 3,000 2,800

previous 3,150 3,000 3,000 3,135 3,000 2,800

Previous - June 2018

ForecastActual

Bridging the gap

Prices overshoot on the downside

● Our June Base Metals Outlook was titled “Mind the gap”, referring

to the likelihood of price weakness in Q3. At that time, the key risk

appeared to be softer Chinese demand, compounded by trade

disputes and near-term dollar strength.

● In essence, this is how things have panned out. The only

difference being that prices have fallen even further than we

then forecast, with sentiment hit hard by a combination of

escalating trade, geopolitical and currency market stresses.

● There is a risk that falling emerging market (EM) financial assets

and commodity prices damage confidence, creating a negative

feedback loop to weaker global growth.

● But, for now, real demand appears to be holding up and our base

case is for prices to recover. In short, we believe that negative

sentiment has overshot reality and that markets are now

excessively discounting future demand prospects.

4

Base Metals Outlook Commodities Strategy

● Indeed, the Chinese authorities already appear to be loosening

policy at the margin – encouraging infrastructure investment and

alleviating some of the recent pressure on non-bank lending –

which should gradually feed through to firmer industrial metals

demand.

● Outside of the macro backdrop, the base metals still possess

constructive fundamental micro-drivers and, it should be noted,

speculative positioning is short across the complex. That creates

the potential for short-covering rallies if trade tensions ease, dollar

strength pauses or EM data manages to outperform already

downgraded expectations.

● In short, we still think the building blocks are in place for base

metals to bridge the “gap” we talked about in June. We have

marked-to-market our price forecasts but still factor in the

likelihood of recoveries over the remainder of H2.

2

Copper: Oversold


Fundamentals balanced rather than bearish

● With prices slumping below $6,000/t, copper’s recent

performance has been weak. But most fundamental barometers

have held firm and we think the metal is now oversold.

● This is particularly true for Chinese demand; which, given the weak

Renminbi, softer headline economic data and concerns about the

impact of trade wars, is where much of the speculative concern

has focussed.

● Yet, visible inventories have been falling despite:

− Domestic production rising 11.6% y/y through July.

− Imports of unwrought copper growing 21% y/y in H1.

● Indeed, after lagging behind the usual pace of seasonal draws,

SHFE inventories have caught down in recent weeks, declining

109kt from July 1st through August 19th. At the same time,

bonded stocks are estimated to have fallen by 44.5kt in July.

● All this points to steady demand in China, with the data

supporting anecdotal indications that consumers have begun to

restock over the past month.

● Furthermore, looking at ytd demand indicators, infrastructure –

grid spend in particular – has been the stand out area of

weakness. Given the recent shift in government rhetoric has

repeatedly emphasised a desire to see increased infrastructure

investment – which we expect to materialise in the data during Q4

– we feel comfortable forecasting a 2.6% y/y increase in China’s

aggregate refined copper consumption.

● The reason this should not, however, tip the market into deficit this

year, is still steady growth in concentrate supply.


6

Base Metals Outlook

Chinese demand indicators – H1 2018 vs H1 2017 y/y

Source: MBR, Antaike, China NBS, Bloomberg, ICBC Standard

Chinese copper imports drifting higher in 2018

Source: MBR, China NBS, Bloomberg, ICBC Standard

-200

0

200

400

600

800

2010 2011 2012 2013 2014 2015 2016 2017 2018

Copper and Copper Product Exports Copper and Copper Product Imports

NET

-20% -16% -12% -8% -4% 0% 4% 8% 12% 16%

Air con

Construction Starts

AC motors

App. Demand

FAI

Autos

Refrig.

Infra FAI

Power grid


But futures appear to be pricing a surplus

● Not only have the vast majority of this year’s labour contract

negotiations passed without significant disturbance but 2018

has also been an unusually low year for mine disruptions due to

other causes, such as accidents, breakdowns and low ore grades.

● Those disruptions which have occurred are largely at the smelter

level – most prominently Vedanta’s force majeure at their 400kt/y

Tuticorin smelter – but, as evidenced by China’s refined production

growth, there has still been sufficient capacity to process this

concentrate. And now, led by Chinalco’s new 400kt/y plant,

additional refined capacity is coming on line.

● One potential source of future disruption, however, is China’s

threat to impose a 25% import tax on US copper concentrates if

the US goes ahead with proposed tariffs on $250bn of Chinese

goods. While the US’s direct exports of copper concentrates to

China are limited, tonnages find their way to China via blending

operations in Mexico and it remains to be seen, if the tax goes

ahead, whether or not this flow could be caught by the tariff.

Non-commercial positioning overly bearish

● Despite this relatively balanced fundamental backdrop, net non-

commercial futures positioning on Comex has fallen back

towards 2016’s bear market lows.

● The futures market is arguably therefore pricing either 1/ demand

having already slowed down or 2/ a significant upcoming slowdown

in demand.

● Given that the evidence for 1/ is somewhat lacking and our view

that 2/ is unlikely to occur, we think this creates the potential for a

sharp short covering rally, once there is any let-up in bearish

sentiment.

●

7


Significant cuts to Comex net-length

Source: CME, CFTC, Bloomberg, ICBC Standard

●

Mine supply disruptions, all causes

Source: MBR, ICSG, Company Reports, ICBC Standard

0

200

400

600

800

1000

1200

1400

1600

1800

2000

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

ytd

00

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on

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-60

-40

-20

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20

40

60

80

100

120

140

190

210

230

250

270

290

310

330

350

Jan-14 Jan-15 Jan-16 Jan-17 Jan-18

Cmx Cu ($) Net MM Positioning (thousand lots, rhs)


Balanced in 2018/19 but deficits set to return

8


Source: MBR, ICSG, Company Reports, China NBS, CNIA, Bloomberg, ICBC Standard

Annual Global Supply/Demand Balance for Copper, 2010-2020

Thousands of tonnes 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Mine production

Total 16,051 16,056 16,690 18,185 18,432 19,148 20,357 19,991 20,670 21,228 21,717

Year-on-year % change 0.6% 0.0% 3.9% 9.0% 1.4% 3.9% 6.3% (1.8%) 3.4% 2.7% 2.3%

Refined production

Africa 870 960 1,057 1,275 1,356 1,382 1,234 1,209 1,336 1,389 1,431

North America 1,664 1,725 1,655 1,717 1,819 1,905 1,989 1,868 1,858 1,869 1,884

Latin America 3,877 3,698 3,419 3,404 3,343 3,312 3,200 3,008 3,068 3,065 3,080

Asia (ex. China) 3,943 3,780 3,910 3,838 4,008 4,035 4,241 4,288 4,092 4,037 4,081

China 4,540 5,163 5,879 6,667 7,649 7,969 8,436 9,041 9,773 10,313 10,725

Australasia 424 477 460 481 509 474 479 431 469 481 491

Europe 3,649 3,797 3,820 3,677 3,794 3,793 3,726 3,815 3,854 3,892 3,912

Total 18,967 19,600 20,200 21,059 22,478 22,870 23,304 23,659 24,450 25,047 25,605

Year-on-year % change 3.9% 3.3% 3.1% 4.3% 6.7% 1.7% 1.9% 1.5% 3.3% 2.4% 2.2%

Refined consumption

North America 2,176 2,203 2,223 2,317 2,259 2,317 2,337 2,363 2,399 2,437 2,481

Latin America 656 600 615 612 579 497 463 458 472 496 511

Asia (ex. China) 4,235 4,135 4,171 4,330 4,500 4,541 4,658 4,774 4,865 4,972 5,097

China 7,393 7,885 8,205 9,400 10,450 10,690 11,214 11,876 12,185 12,550 12,964

Europe 4,225 4,495 4,201 4,150 4,288 4,062 4,102 4,192 4,272 4,345 4,410

Others 416 402 373 333 270 269 225 227 234 241 248

Total 19,101 19,720 19,788 21,142 22,346 22,376 22,999 23,891 24,426 25,041 25,710


Implied surplus (deficit) (134) (120) 412 (83) 132 494 305 (232) 24 6 (105)

Stocks analysis

LME 378 372 321 366 172 236 328 202

COMEX 59 80 64 15 26 70 83 211

SHFE 132 93 205 126 106 183 147 150

Chile 184 204 279 353 503 494 385 379

Other producer 296 295 334 284 317 299 294 300

Merchant 21 21 22 14 17 19 18 10

Consumer 109 120 116 111 118 120 121 120

Chinese bonded 375 325 775 550 590 375 465 470

Total 1,554 1,510 2,116 1,819 1,849 1,796 1,841 1,842 1,866 1,872 1,766

Stocks as weeks of consumption 4.2 4.0 5.6 4.5 4.3 4.2 4.2 4.0 4.0 3.9 3.6

3

Aluminium:

Heightened uncertainty


Prices retreat but major uncertainties remain

● After Q2’s US trade and sanctions policy driven price volatility,

prices have followed the complex lower over the course of June-

August. Nevertheless, the recent $2,000-2,150/t range belies

the fact that significant uncertainties remain.

● Stepping back from the market noise, it should be noted that

Rusal’s H1 alumina output was flat y/y, while aluminium output

actually increased 2%. The impact of sanctions was, however,

visible in a reduced share of value added products (VAPs) and 12%

decline in aluminium sales.

● At present, our base case still assumes that the company’s

refineries and smelters will continue to supply the market. But

this is already reflected in both the price and physical premiums –

which, outside of the US where tariffs are compounding localised

tightness, have also unwound their earlier spike.

● Risks are clearly therefore skewed towards a scenario where the

company fails to extricate itself from sanctions before the

October 23rd deadline for Rusal-related transactions to be wound

down. So long as the US Treasury is yet to make a formal

announcement on the subject, the market will be liable to

reintroduce a degree of supply risk premium as October

approaches.

● In addition to the question of Rusal supply, the timing of Alunorte’s

return to full production remains uncertain and 1,600 of 3,500

workers at Alcoa’s Australian bauxite and alumina operations have

voted for an indefinite strike. The issue of alumina cost push

pressures is far from resolved.

●

10


Physical premiums adjust lower outside of the US

Source: MBR, ICBC Standard

0

100

200

300

400

500

600

Jan

15

Ma

r 1

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EU duty paid Midwest Japan

Aluminium prices outperforming but still easing back in Q3

Source: LME, Bloomberg, ICBC Standard

70

75

80

85

90

95

100

105

110

115

Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18

Aluminium Copper Zinc


Chinese smelters still the key swing supplier

●

●

11

Base Metals Outlook


Supply uncertainty supporting alumina prices

Source: MBR, Bloomberg, ICBC Standard

Chinese exports incentivised by the SHFE discount to LME

Source: LME, SHFE, China NBS, Bloomberg, ICBC Standard

● Indeed, although alumina prices have retreated from the record

levels registered in April, ongoing supply concerns are contributing

to a renewal of upward pressure in recent weeks.

● In addition to the aforementioned ex-China issues, several

Chinese refineries have announced at least temporary closures

on account of bauxite shortages. This raw material constraint

stems from domestic mines facing increased environmental

scrutiny but, so far, is being offset by additional output from

refineries processing imported bauxite from Australia and Guinea.

● As a result, China’s alumina production increased 2.4% y/y

through July, near enough keeping pace with 3% y/y ytd growth

in primary aluminium production.

● Such Chinese primary supply growth is in-line with our 3.6% y/y

2018 forecast, which we therefore keep unchanged. This metal is

also not only keeping the Chinese market well supplied – SHFE

stocks are still above 900kt – but also remains the key balancing

element for ex-China deficits.

● Incentivised by SHFE’s discount to LME prices, China’s net exports

of aluminium and aluminium products rose 15% y/y in H1, to a

total of 2.4Mt.

● Given the already tight ex-China market, any reduction in this

export flow – on account of firmer Chinese demand, further

alumina tightness, protectionist trade policies or harsher than

expected winter pollution closures – would quickly tip the global

market into a significant aggregate deficit.

● Our base case supply-demand outlook remains broadly unchanged

through 2020, with prices forecast to rise gradually towards

$2,300/t. That said, there are clearly a host of potential issues

that could quickly shift aluminium in a far more volatile direction.

0%

10%

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30%

40%

50%

60%

70%

0

200

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1,000

1,200

1,400

1,600

Jan

16

Ma

r 1

6

Ma

y 1

6

Jul 1

6

Se

p 1

6

No

v 1

6

Jan

17

Ma

r 1

7

Ma

y 1

7

Jul 1

7

Se

p 1

7

No

v 1

7

Jan

18

Ma

r 1

8

Ma

y 1

8

Jul 1

8

Alu

min

a in

pu

t co

st

as %

of

LM

E

pri

ce

Alu

min

a in

pu

t co

st

for

1t

of

Al -

$/to

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Cost of alumina to produce 1t Al (LHS)

Alumina input cost as % of LME (RHS)

-500

-300

-100

100

300

500

0

100

200

300

400

500

2012 2013 2014 2015 2016 2017 2018

Net China Aluminium and Aluminium Product Exports SHFE - LME (US$/t, rhs, 1m lead)


Sustained, albeit small, deficits

●

12

Base Metals Outlook


Source: MBR, IAI, Company Reports, China NBS, Bloomberg, ICBC Standard Bank

Annual Global Supply/Demand Balance for Aluminium, 2010-2020


Production

Africa 1,742 1,808 1,620 1,776 1,748 1,674 1,661 1,674 1,674 1,729 1,729

North America 4,691 4,971 4,851 4,918 4,571 4,475 3,966 3,961 4,127 4,193 4,246

Latin America 2,305 2,184 2,088 1,912 1,543 1,323 1,368 1,347 1,236 1,324 1,236

Asia (ex. China) 2,691 2,836 3,002 2,800 3,315 3,734 4,495 5,105 5,585 5,870 6,313

Western Europe 3,800 4,027 3,599 3,435 3,382 3,521 3,729 3,754 3,828 3,828 4,016

Eastern/Central Europe 4,532 4,744 4,719 4,592 4,278 4,213 4,356 4,395 4,441 4,441 4,591

Australasia 2,277 2,306 2,186 2,106 1,995 1,984 1,981 1,854 1,914 1,914 1,914

China 17,332 19,647 22,879 25,892 28,469 31,686 32,784 36,371 37,663 39,230 40,830

Middle East 2,796 3,374 3,759 3,936 4,835 5,222 5,229 5,173 5,289 5,665 5,780

Total 42,165 45,896 48,704 51,367 54,136 57,832 59,569 63,635 65,758 68,194 70,656


Consumption

North America 4,628 4,803 5,363 5,388 5,747 5,922 6,175 6,354 6,533 6,723 6,857

Latin America 1,812 1,983 1,996 2,038 1,963 1,758 1,679 1,718 1,779 1,862 1,911

Asia (ex. China) 8,317 8,915 9,093 6,941 7,279 7,572 7,934 8,317 8,694 9,022 9,483

Western Europe 6,602 6,737 6,514 6,403 6,742 6,656 6,930 7,094 7,249 7,356 7,442

China 16,414 19,041 21,453 24,234 26,872 29,334 31,993 34,520 36,419 38,121 39,582

Others 2,767 2,848 2,775 4,772 5,023 5,183 5,327 5,447 5,628 5,810 6,023

Total 40,539 44,326 47,194 49,777 53,626 56,426 60,037 63,450 66,302 68,893 71,298


Implied surplus (deficit) 1,626 1,570 1,510 1,590 510 1,406 (467) 185 (544) (699) (642)

Stocks analysis

LME 4,275 4,979 5,210 5,458 4,210 2,896 2,184 1,101

SHFE 441 208 442 182 210 297 101 754

Japan 224 247 284 263 413 394 276 242

Estimated Industrial Stocks 1,796 2,872 3,880 5,503 7,083 9,735 10,294 10,943

Total stocks 6,736 8,306 9,816 11,406 11,916 13,322 12,855 13,040 12,496 11,797 11,155


4

Nickel: Appearance vs.

Reality


Substantial reported deficits

Yet appearances can be deceiving

● The INSG continues to report substantial monthly supply-demand

deficits – 11 consecutive deficits up to May (the latest month for

which data is available). Their cumulative ytd net deficit is now

running at 69.6kt, well ahead of the 50.1kt deficit recorded for the

same period last year.

● Although we are fundamentally bullish nickel, our 2018 deficit of

46kt pales in comparison to those being racked up on the INSG’s

estimates. INSG reaches its Jan-May deficit using world apparent

demand growth of 9.7% y/y, outpacing supply growth of 7.9% y/y.

Most of this demand growth comes from Indonesia, where

Tsingshan has been ramping up production at its integrated NPI-

stainless complex.

● Given that exchange stocks (LME + SHFE) have declined by 150kt

ytd, the INSG’s deficits appear to be supported by the data. But we

think this confuses important differences between real and

apparent demand.

● Stainless production only began in July last year, so national

consumption of refined nickel has gone from zero in Jan-May 2017

to an estimated 68.5kt in Jan-May 2018. Remarkably, that level

already puts Indonesia almost on a par with Japan as the world’s

second-largest nickel-consuming country.

● We see two potential issues with projecting such large deficits

based on this surging Indonesian demand:

− The INSG has pencilled in figures of 14kt and 15kt for

consumption in April and May, these round numbers look like

estimates that could well be revised.

− Indonesia is not itself consuming all this stainless steel and we

expect higher cost Asian production – and hence nickel

consumption – to come under pressure over the course of H2.

14


●

Indonesian refined nickel demand closing in on Japan

Source: INSG, MBR, ICBC Standard Bank

●

INSG nickel supply-demand balance

Source: INSG, MBR, ICBC Standard

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Indonesia Japan


NPI production bouncing back from environmental inspections

But insufficient to return the market to surplus

● Furthermore, we suspect that INSG numbers account for

stockpiling of nickel in the battery supply chain as

‘consumption’. This would overstate real consumption and go

some way to explaining the drawdown of exchange stock.

● Although this metal is unlikely to be released back to the market, it

will provide a cushion against future battery related increases in

real demand, as purchases have effectively been brought forward

to take advantage of still relatively low metal prices.

● On the supply side, Chinese NPI production was dragged down in

Q2 by a round of environmental inspections. Resulting in output

dropping from 41.1kt in March to 33.6 kt in June, according to

Antaike.

● But the end of this inspection round means that NPI production

began to recover in July; with provisional estimates pegging output

for the month at 35.5kt.

● Given tightness in China’s high-grade NPI market and ample ore

availability (imports were up 68% y/y in Jan-May and stocks were at

18-month highs in July), domestic NPI production should

accelerate towards 38ktpm over August and September, before

returning to more than 40ktpm in Q4.

● Although the underlying balance is therefore expected to ease at

the margin, the market should remain in overall deficit, with visible

refined stocks continuing to draw.

15


●

●

Chinese NPI production recovering in July

Source: MBR, Antaike, ICBC Standard

●

Chinese nickel ore imports – up 18% y/y in Jan-May

Source: MBR, Antaike, China NBS, ICBC Standard

15

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25

30

35

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Jul 15 Jan 16 Jul 16 Jan 17 Jul 17 Jan 18 Jul 180

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J F M A M J J A S O N D

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2018 2017 2016 2015


Deficits finally denting legacy inventories

●

16


Source: MBR, INSG, Company Reports, ICBC Standard

Annual Global Supply/Demand Balance for Nickel, 2010-2020


Mine production

Total 1,637 2,199 2,358 2,595 2,164 2,152 2,006 2,191 2,322 2,392 2,471

Year-on-year % change 20.7% 34.3% 7.2% 10.1% (16.6%) (0.6%) (6.7%) 9.2% 6.0% 3.0% 3.3%

Refined production

Africa 36 37 41 59 75 89 84 79 82 84 85

North America 105 142 152 153 150 159 158 158 152 146 143

Latin America 118 126 154 133 144 144 145 151 158 163 166

Asia (ex. China) 205 196 209 229 244 297 376 462 564 609 633

China 332 435 519 694 691 600 573 624 660 700 725

Australasia 141 150 174 190 201 210 212 216 225 227 231

Europe 503 516 510 498 484 477 435 393 399 402 415

Total 1,442 1,602 1,760 1,955 1,988 1,976 1,984 2,082 2,238 2,330 2,398

Year-on-year % change 9.7% 11.1% 9.9% 11.1% 1.7% (0.6%) 0.4% 5.0% 7.5% 4.1% 2.9%

Refined consumption

North America 130 141 145 153 158 151 156 162 164 168 169

Latin America 23 24 21 22 21 21 24 22 23 23 24

Asia (ex. China) 354 347 340 335 353 362 381 466 522 569 592

China 575 704 770 899 957 980 1,090 1,159 1,193 1,246 1,321

Europe 356 364 364 351 360 342 344 346 351 354 356

Others 27 27 27 26 24 27 31 31 33 34 36

Total 1,465 1,607 1,668 1,785 1,873 1,882 2,026 2,185 2,284 2,395 2,498


Implied surplus (deficit) (23) (5) 92 170 115 95 (42) (104) (46) (63) (98)

Stocks analysis

LME 137 91 142 262 415 441 371 368

SHFE 0 0 0 0 0 49 94 44

Producer 90 96 87 88 92 85 85 88

Consumer and merchant 18 20 22 20 20 22 19 20

Total 245 206 250 369 527 597 569 520 474 411 313


5

Zinc: No surplus yet


Mining ramp-up underway but yet to deliver a concentrate surplus

● The recent underperformance of zinc prices – down 26% ytd at

time of writing – is naturally raising the question of whether the

market has already tipped back into surplus.

● The 118kt build in LME inventory since March’s low – much of it

delivered into New Orleans – contributes to the perception that

surplus has arrived but we think these moves reflect inventory

shuffling more than any change in the fundamental balances.

● Even with little in the way of meaningful setbacks or delays among

miners bringing new or restarted capacity on line, we still forecast

concentrate and refined market deficits for 2018. Indeed, we

think 2019 will mark the concentrate market’s return to balance,

before the refined market follows suit in 2020.

● Driving this gradual rebalancing are four major projects which in

aggregate add c.900kt/y of additional mine capacity once fully

ramped-up over the next 1-2 years.

● Specifically, MMG’s Dugald River had already reached commercial

production ahead of schedule in May, New Century’s eponymous

project has resumed mining and produced its first concentrate in

August, Vedanta’s Gamsberg should start operations in September

and Glencore’s Australian assets continue their return.

● But even against this backdrop, H1 global mine production did

not grow materially because these increments are skewed to H2

and beyond and because Chinese production has been particularly

weak ytd.

● Indeed, NBS and Antaike estimates show mine supply in China

down between 7.7% and 9.6% in H1, due to extended winter

closures, falling ore grades and tighter environmental inspections.

18


12m MA of global Zn mine production – recovery on pause in H1

Source: ILZSG MBR, ICBC Standard

● Chinese Zn mine production – 9.6% y/y decline in H1

Source: MBR, China NBS, ICBC Standard Bank

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es


Macro drivers dominating micro dynamics

● Based on latest guidance from the miners we track, ex-China

output from this group should jump by 231kt in H2 and then a

further 650kt in 2019.

● This anticipated H2 increment, combined with a marginal

improvement in Chinese production, means we maintain our full

year forecast of 5% mine supply growth. The same is true for

refined production, where we forecast an annual global increase

of 3.8%, as improving concentrate availability should see

production pick-up pace from H1’s 2% growth.

● Another round of Chinese environmental inspections or extension

of co-ordinated smelter cut backs could curb this near-term growth

but the bigger issue for 2019 will be the pace at which this mine

supply can be delivered into the refined market.

● Specifically, the question then becomes whether there is the

potential for a smelting bottleneck to delay the pass-through of

concentrate into refined metal. An issue which has become more

pertinent in light of stricter Chinese environmental policies and

examples of co-ordinated production discipline among some

smelters earlier this year.

● Although TCs have moved higher towards $70/t in recent weeks,

the current concentrate dynamics mean it is too early to judge the

outcome of this debate. Rather, it will be once the aforementioned

mine supply growth is in full swing that we could see a dramatic

reversal of TC dynamics.

● In the meantime, zinc metal prices are more likely to be driven by

overall macro sentiment and US dollar dynamics than fundamental

nuances. But, as with copper, we view the downgrade of future

supply-demand expectations that recent price moves imply as

excessive and see scope for prices to climb back towards

$3,000/t. 19


Implied zinc concentrate market balance

Source: MBR, ILZSG, Company Reports, Customs Data, Bloomberg, ICBC Standard

● Zinc concentrate TCs

Source: MBR, ICBC Standard

-800

-600

-400

-200

0

200

400

2010 2012 2014 2016 2018 2020

00

0 t

on

ne

s

3000

3500

4000

4500

5000

5500

6000

$0

$50

$100

$150

$200

$250

Jul 15 Jan 16 Jul 16 Jan 17 Jul 17 Jan 18 Jul 18

Rm

b/to

nn

e

US

D/to

nn

e

Annual benchmark ($/t) Imported spot ($/t)

Domestic spot (RMB/t) [RHS]


Refined market rebalancing a 2020 story

●

20


Source: MBR, ILZSG, Company Reports, Customs Data, Bloomberg, ICBC Standard

Annual Global Supply/Demand Balance for Zinc, 2010-2020


Mine production

Total 12,360 12,582 12,901 13,039 13,493 13,614 12,781 13,000 13,676 14,565 15,235

Year-on-year % change 6.5% 1.8% 2.5% 1.1% 3.5% 0.9% (6.1%) 1.7% 5.2% 6.5% 4.6%

Refined production

Africa 273 246 167 136 126 79 86 84 91 98 106

North America 1,261 1,232 1,234 1,212 1,147 1,182 1,138 1,067 1,163 1,186 1,204

Latin America 554 642 604 626 612 597 575 575 581 587 592

Asia (ex. China) 2,712 2,834 2,856 2,898 2,773 2,873 2,681 2,781 2,837 2,888 2,945

China 5,209 5,212 4,881 5,280 5,807 5,860 6,274 6,220 6,531 6,890 7,304

Australasia 499 515 501 498 488 489 470 462 471 472 472

Europe 2,355 2,398 2,385 2,354 2,445 2,477 2,395 2,408 2,434 2,447 2,459

Total 12,863 13,079 12,628 13,004 13,398 13,557 13,619 13,597 14,108 14,568 15,082

Year-on-year % change 13.8% 1.7% (3.4%) 3.0% 3.0% 1.2% 0.5% (0.2%) 3.8% 3.3% 3.5%

Refined consumption

North America 1,184 1,221 1,255 1,297 1,346 1,299 1,205 1,231 1,256 1,268 1,281

Latin America 432 428 395 396 402 388 355 367 384 397 409

Asia (ex. China) 2,669 2,633 2,679 2,832 2,839 2,618 2,852 2,839 2,896 2,962 3,036

China 5,403 5,458 5,343 5,927 6,401 6,337 6,654 6,966 7,112 7,326 7,509

Europe 2,489 2,513 2,377 2,372 2,349 2,413 2,378 2,349 2,372 2,420 2,468

Others 368 378 367 350 345 320 304 319 327 336 347

Total 12,545 12,631 12,416 13,174 13,682 13,375 13,748 14,071 14,346 14,710 15,050

Year-on-year % change 15.8% 0.7% (1.7%) 6.1% 3.9% (2.2%) 2.8% 2.3% 2.0% 2.5% 2.3%

Implied surplus (deficit) 318 448 212 (170) (284) 182 (129) (474) (238) (142) 33

Stocks analysis

LME 701 821 1,221 931 691 463 428 182

SHFE 309 364 311 239 83 200 153 69

Producer 305 333 325 296 371 373 395 375

Consumer 122 128 132 147 154 163 133 136

Merchant 15 14 13 13 13 12 12 14

SRB 109 109 209 254 254 254 254 254

Total 1,561 1,769 2,211 1,880 1,566 1,465 1,375 1,030 792 650 682


6

Lead: Physical tightness

persists


Mine supply delivers downside surprise

● Lead has been dragged down alongside its peers but this is

another market that should recovery steadily once trade,

geopolitical and currency-related stresses subside sufficiently for

fundamentals to reassert themselves.

● Even as exchange prices have fallen in recent months, it is notable

that – in contrast to zinc – TCs are yet to show signs of

concentrate market loosening. In fact, they slipped lower again in

July.

● As always in lead, there are complications with the reported

fundamental data and the ILZSG figure of +3.1% global mine

supply for Jan-May stands in contrast to the picture painted by TCs.

● Given much of this perceived growth comes from Chinese

production having added 13.6% y/y, we remain sceptical of the

ILZSG’s figures. Not only are they at odds with TCs but also reports

of disruptions to Inner Mongolian output, restrictions on the use of

explosives and generally tighter environmental controls. We

therefore prefer to use NBS estimates of domestic Chinese mine

production, which suggest a 3.3% y/y fall in H1.

● As for ex-China output, we track mine-by-mine figures for c.60% of

lead production and Q2 results for this sample shows an H1

decline of 4.9% y/y. Unlike the China data, this tallies closely with

ILZSG estimates of a 5.7% y/y output drop in Jan-May.

● Global lead mine production therefore appears to have declined

by c.4% in H1, compared with our previous forecast for a full-year

increase of 3%. Nonetheless, given the anticipated H2 by-product

growth from expanding Zinc mines (discussed in that metal’s

section of this report) we still forecast overall growth for the year

but have cut this to 2%.

●

22


Chinese refined lead production

Source: ILZSG, MBR, ICBC Standard

● Lead concentrate TCs – back down in July

Source: MB, ICBC Standard

-25

0

25

50

75

100

125

150

Jul 16 Jan 17 Jul 17 Jan 18 Jul 18

$/to

nn

e

Low silver High silver

0

50

100

150

200

250

300

350

400

May 12 May 13 May 14 May 15 May 16 May 17 May 180

00

to

nn

es

Primary Secondary


While refined supply remains restrained

● Specifically, H2 guidance issued for our sample set of lead miners

suggests full-year output growth of 14kt before 2019 production

delivers a more substantive c.100kt increase.

● As a result, primary refined output looks set to be restrained

beyond the end of this year, with any significant rise therefore

dependent upon secondary smelters.

● Data from the NBS and Antaike both suggest a 4-5% fall in total

Chinese refined lead production in H1 2018, reflecting the

aforementioned raw material shortages and environmental

inspections.

● But the latest round of inspections concluded in July and new

secondary capacity is coming on line. So, while we have lowered

our annual production growth forecasts from c.4% to 2.6% and

3.8% for 2018 and 2019 respectively, we have not slashed them

dramatically.

● Although these supply adjustments tighten our balances, the

swing is not dramatic because we have also trimmed demand

growth projections. Lead-acid battery production did not register

any growth in H1 and, allowing for looser credit conditions to

support demand in H2, we have lowered our full year growth

forecast to around 2%.

● These revisions result in a slightly larger 2018 deficit – 88kt

versus 31kt previously – but do not change the overall narrative

of a market gradually rebalancing over of 2018-2020. Given

constraints on supply, the greater risk would appear to be a slower

than forecast rebalancing process but an anticipated recovery in

prices should also deliver some incremental scrap supply to the

market.

●

23


● Chinese lead-acid battery production – no growth in H1

Source: MBR, Antaike, ICBC Standard

● Global refined lead supply-demand balance

Source: MBR, ILZSG, Company Reports, Customs Data, ICBC Standard

0

5000

10000

15000

20000

25000

Jun 10 Jun 12 Jun 14 Jun 16 Jun 18

kV

AH

Production 12 per. Mov. Avg. (Production)

$1,500

$1,750

$2,000

$2,250

$2,500

(200)

0

200

400

600

2010 2012 2014 2016 2018 2020

00

0 t

on

ne

s

Balance Price


Deficits deeper but still on course for balance by 2020

●

24


Source: MBR, ILZSG, ICBC Standard Bank

Annual Global Supply/Demand Balance for Lead, 2010-2020


M ine pro duct io n

T o tal 4,161 4,631 4,920 5,265 4,946 4,780 4,782 4,871 4,968 5,157 5,322

Year-on-year % change 9.2% 11.3% 6.2% 7.0% (6.1%) (3.4%) 0.0% 1.9% 2.0% 3.8% 3.2%

R efined pro duct io n

Africa 116 120 100 99 126 113 121 124 126 129 132

North America 1,777 1,884 1,836 1,779 1,773 1,663 1,738 1,629 1,645 1,640 1,657

Latin America 268 319 383 546 383 336 333 349 359 370 381

Asia (ex. China) 1,463 1,663 1,715 1,735 1,941 1,955 2,212 2,280 2,326 2,377 2,436

China 4,158 4,604 4,591 4,935 4,704 4,700 4,800 5,027 5,158 5,354 5,605

Australasia 229 246 203 232 226 223 224 211 222 223 225

Europe 1,737 1,799 1,820 1,865 1,868 1,952 1,904 1,951 1,959 1,974 1,984

T o tal 9,748 10,635 10,648 11,191 11,021 10,942 11,332 11,571 11,795 12,067 12,420


R efined co nsumptio n

North America 1,642 1,551 1,795 1,989 1,908 1,776 1,854 1,879 1,879 1,898 1,945

Latin America 365 388 394 379 382 384 384 375 384 400 420

Asia (ex. China) 1,793 1,933 2,048 2,042 2,121 2,189 2,290 2,330 2,405 2,465 2,514

China 4,171 4,588 4,574 4,912 4,709 4,662 4,837 5,050 5,146 5,275 5,443

Europe 1,644 1,660 1,660 1,712 1,734 1,733 1,866 1,920 1,932 1,941 1,945

Others 125 119 125 130 144 137 113 135 138 140 143

T o tal 9,740 10,239 10,596 11,164 10,998 10,881 11,344 11,689 11,883 12,118 12,411


Implied surplus (def ic it ) 8 396 52 27 23 61 (12) (118) (88) (51) 10

Sto cks analysis

LM E 209 353 319 214 222 192 195 142

Producer 127 129 137 179 187 154 165 147

Consumer and merchant 111 92 110 123 113 96 124 151

SHFE 0 31 75 90 64 13 29 42

T o tal 447 605 641 606 586 455 513 482 394 343 352



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Base Metals Outlook · Base Metals Outlook Bridging the gap 3 Copper 5 Aluminium 9 Nickel 13 Zinc 17 Lead 21 2 Strategy This is a marketing communication which has been prepared by