VANCOUVER (miningweekly.com) – Bank of America Merrill Lynch (BofAML) cast a pall on the budding optimism seen at the recent Prospectors and Developers Association of Canada’s yearly convention, in Toronto, saying that the commodity market, in general, is transitioning from tailwinds to headwinds this year.

In its ‘Global Metals Weekly’ report, the group noted that mined commodities have held up moving into 2017, supported by supply discipline and steady demand.

Production problems have been most visible in copper, where disruptions are annualising at two-million tonnes so far this year, compared with the 1.2-million tonnes required for the full year to deliver just a small deficit.

Meanwhile, demand, proxied for instance by purchasing managers’ indexes, has been supported, although persistently high economic policy uncertainty is a key risk to sentiment and confidence.

Similarly, while activity in key metal-using sectors in China has broadly held up, growth rates have started to slow. Given that the country's government is gradually removing stimulus, this dynamic may become more pronounced into the second half of the year, BofAML analysts advised.

Protectionism is also a key risk. “In short: we see some further upside to prices towards summer, but we are concerned that commodities may come under pressure later this year,” BofAML stated.

OUTLOOK UPDATE
Aluminium has rallied in recent weeks on expectations that China may cut production capacity and BofAML has raised its aluminium price forecasts 15.3% to $1 931/t for 2017, and 21.9% from the previous forecast to $1 950/t by 2018.

Seasonally weak copper demand in China caps the upside for now, despite severe supply disruptions. Ongoing metal deliveries into Asian London Metals Exchange warehouses do not represent a wholesale weakening of fundamentals. “Indeed, seasonally stronger offtake towards summer should push copper prices up, before a slowdown of activity may take its toll later this year, with copper potentially averaging $4 750/t ($2.15/lb) in the fourth quarter.

For the full year, BofAML lifted the copper price forecast 6.1% to $5 675/t and 20.8% to $6 042/t by 2018.

Nickel could move into a substantial deficit if the Philippines shutters mines and Indonesia does not swamp the market with ore. The price forecast declined 0.6% to $12 175/t in 2017, and remained constant for 2018 at $13 500/t.

Zinc mine supply will remain extremely tight, but the refined market is well supplied, according to BofAML. Fundamentals remain strong, but this dynamic suggests that the metal may not replicate last year's rally in 2017. The price forecast for 2017 has been revised upward 4.1% to $2 825/t, and to rise 7.3% over the previous forecast to $2 950/t in 2018.

BofAML analysts also pointed out that gold has come under pressure in the run-up to the next US Federal Reserve rate hike. While tighter monetary policy is not bullish, inflation and a range of uncertainties, including European elections and protectionism should support the yellow metal. “As such, we see prices at $1 400/oz by year-end."

"Platinum remains oversupplied on lack of production discipline, especially in South Africa. Provided miners took out 300 000 oz to 400 000 oz of supply, the metal could rally and we see various companies potentially removing excess ounces,” the analysts forecast.

The bulk commodities have been among the best performing raw materials in the mining complex. BofAML attributed this mainly to production and capacity cuts in China. While steel margins, a muted iron-ore supply response and cost inflation support iron-ore for now, some destocking and a normalisation of margins should ultimately remove support.

Thermal coal is expected to trade in a range set by China's authorities, with the commodity set to average $80/t in 2017.