Morgan Stanley Bets Metal Losers of 2015 to Shine Next Year

  • Nickel has slumped 44 percent this year on weak demand
  • Bank sees only ``modest abatement'' in demand growth

Nickel, copper and zinc, the three base metals that have posted the steepest declines in 2015, were chosen by Morgan Stanley as its top picks heading into next year.

“We are stubborn nickel bulls in 2016,” analysts including Tom Price and Joel Crane wrote in the bank’s quarterly metals report dated Dec. 15. They expect nickel to average $10,692 a metric ton next year, with zinc forecast at $1,747 a ton and copper at $5,236 a ton.

Base metals have slumped along with other commodities to multi-year lows as the slowdown in growth in China hurts demand in the world’s largest user. The rout has prompted metals producers in Asia’s top economy to plan output cuts or rein in capacity growth, while miners outside China, including Glencore Plc, have also reduced supply.

“We continue to see only a modest abatement in China-led commodity demand growth, not the capitulation that year-to-date price performances imply,” Morgan Stanley said. “The fact that economic activity everywhere remains buoyant, commodity-trade flows are intact, and that producers are rapidly rebalancing their trades in reply to shock-low prices tells us that downside price risk is limited.”

Defies Forecasts

Three-month nickel on the London Metal Exchange ended at $8,550 a ton on Tuesday after losing 44 percent in 2015. Copper was at $4,565, down 28 percent, while zinc was 31 percent lower at $1,504.

Nickel is also the top pick among metals for analysts at Credit Suisse Group AG. Supply cuts should be expected “given the scale of losses that producers are incurring,” they wrote in a note dated Dec. 15. 

The metal has defied forecasts that a ban on exports of ore from Indonesia, which used to be China’s biggest supplier, would drive up prices of the refined metal used in stainless steel. Tuesday’s close is 56 percent below a consensus of analyst forecasts at the start of this year.

“We see speculative trading and destocking as having acted excessively on the price, exposing more of the industry to losses than could reasonably be expected in a global economy that is reporting positive stable growth,” Morgan Stanley said.

Stockpiles of nickel in LME warehouses fell to their lowest in a year on Dec. 9, before reversing course in the last week to rise 7.7 percent to 423,516 tons. Chinese imports have also jumped while a plan by its nickel producers to cut output by 20 percent next year prompted only a short-lived rally in prices.

Stronger signs of a recovery in stainless steel demand are needed to “solidify confidence in the upside” for nickel, Deutsche Bank AG analysts including Paul Young and Brett McKay said in Dec. 15 note. “In the near term, the key issue will be how quickly the elevated refined stock levels are pulled through the chain.”

Nickel rose 1.2 percent to $8,650 a ton by 1:17 p.m. in Shanghai, reversing from a 2.3 percent drop on Tuesday.

— With assistance by Martin Ritchie, and Jake Lloyd-Smith

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