Base metals showed weakness in the second half of 2014 which has well and truly extended into 2015 due to lower oil prices and weak investor sentiment.
 
“With the likelihood of further weakness in economic growth in China, the headwinds for base metal markets are unlikely to ease,” ANZ said.
 
As a result, ANZ downgraded its 2015 copper price forecast by 19% to $US5385 per tonne, or roughly $2 per pound – which is below the six-year low for copper reached in January.
 
It is particularly bearish given consensus of $2.89/lb and forecasts of $2.85/lb from UBS and around $2.91/lb from Macquarie.
 
Nickel was downgraded by 17% to $17,625/t, around $2500/t higher than the current price.
 
Tin was downgraded by 19% to $18,875/t and lead was downgraded by 17% to $1850/t.
 
The 2015 forecast for zinc was revised down by 8% to $2163/t, while aluminium was only downgraded by 6% to $1800/t.
 
“Despite the downgrades, we believe the selling to be overdone,” ANZ said.
 
But ANZ predicts base metals are still unlikely to see any sustained rise above current levels in the first half of the year.
 
“Later on in 2015, we expect macro conditions to stabilise, allowing markets with non-cost related supply constraints to push higher,” it said.
 
“Further downgrades in expectations for growth in China will remain a major downside risk for base metals.”
 
UBS favours Sandfire Resources, Western Areas and Sirius Resources in the base metals space, but said Mincor Resources and Panoramic Resources would continue to benefit from the falling Australian dollar and exploration success.
 
Macquarie noted last week that sharp downwards moves in copper, zinc and lead last month were already biting into operating cost curves, causing job losses, cost-cutting and even mine suspensions.
 
According to Macquarie, seven copper, zinc and lead mines announced closures in December and January, pulling around 50,000 tonnes per annum each of copper and zinc from the market, and 95,000tpa lead.
 
More are under review – primarily African copper operations – mainly due to hefty tax increases in Zambia, while it was hard to predict Chinese supply.
 
“While all three metals are represented in the closures announced in the last couple of months, it is clear that copper mines coming under greater scrutiny at this stage; unsurprising, given the five-and-a-half year lows recently plumbed and also the speed of the price decline,” Macquarie said.
 
“Mines that a couple of months ago could have been, not unreasonably, holding out for $7000/t will now surely retain no illusions that a return to a ‘7’ handle is imminent.”
 
Following guidance updates in recent quarterly reports, Macquarie said the copper market now looked effectively balanced with a surplus of 55,000t, not accounting for production disruptions.
 
“This evolving supply fragility means that we therefore see a much higher likelihood of mine disruptions exceeding the original forecast allowance and transferring supply reductions to the ultimate refined balance – tightening an already tight annual market – and supporting our continued bullish view for the price,” Macquarie said.
 
“Simply put, with supply already struggling to meet projected requirements, a price that clearly de-motivates output is not expected to be sustained but rather forced upwards, by good old-fashioned supply-demand fundamentals.”