Copper Continues to Reel under Extreme Global Economic Pressures

Posted on 6th January 2020 by Dr. Hanish Kumar Sinha Deputy Vice President - Research & Development, NBHC

For the entire year of 2019 copper market experienced the fallout effect of the Sino US trade war which showed varying facets as and when the two interested parties came close to an agreement and then parted ways. The US-China trade war has had a huge impact on copper. The copper prices have taken a beating since the start of the trade conflict.The falling GDP numbers, strengthening dollar, declining demand and increasing concentrate supplies and stable mine supplies: all kept copper under tremendous pressure and engulfed in gloom of uncertainties. Earlier, the truce in the trade war was expected in mid - December with the implementation of Phase One of the trade deal between the US and China. The deal is still somewhat nebulous and no-one seems sure whether there will be a "Phase Two" as there has been a general feeling that the US –China Trade War has almost peaked up and is bound to subside in the coming months. Thus the uncertainty still continues and the current US aggressive stand in the Middle East especially with Iran & Iraq is also adding more anxiety to the existing unpredicted situations.

The trade deal developments and its impact on the global economy is likely to remain the trendsetter of Copper prices in 2020.A successful deal would boost global economic activity and improve the demand for base metals and vice versa move might leady the major economies in grip of extended slowdown. Perhaps the biggest sigh of relief came in December when the United States and China said they would sign a deal this month that puts at least a temporary stop to their tit-for-tat trade war. Instead of tariff increases on Chinese goods, which Mr. Trump had threatened to institute Dec. 15, he and President Xi Jinping have agreed to a pact, set to be signed Jan. 15, that rolls back some tariffs on both sides and includes Chinese pledges to buy more American goods, take various steps to protect intellectual property, and open its financial sector to foreigners.

Supply of the copper has been greatly affected by several ecological as well as political issues. The political situation in South America in Chile and neighbouring nations deteriorated and the public took to the streets to demonstrate. Chile, largely maintained production and operated normally through early November at the height of the unrest, though some mining companies had warned that protests, strikes, and road blockades were taking a toll.Preliminary data indicates that world mine production declined by about 0.4 per cent in the first nine months of 2019, with concentrate production remaining essentially unchanged and solvent extraction-electro-winning (SX-EW) declining by 1 per cent. Reduced output in major producing countries had more than offset growth in other countries. Production in Chile, the world’s biggest copper mine producing country, declined by 0.3 per cent mainly due to lower copper head grades and some production disruptions that occurred early in the year. Indonesian output declined by 50 per cent as a consequence of the transition of the country’s major two mines to different ore zones leading to temporarily reduced output levels. After growth of 13 per cent in 2018, aggregated production in the Democratic Republic of Congo (DRC) and Zambia declined by 3 per cent as consequence of temporary suspensions at SX-EW mines, reductions in planned production and operational constraints. Production in a number of major copper mine producing countries, including Australia, China, Mexico, Peru and the United States increased due to improved grades and a recovery from constrained output in 2018. Panama started producing copper in March 2019, with the commissioning of the Cobre de Panama mine, and was the biggest contributor to world mine production growth in the first nine months of 2019. Preliminary data indicates that world refined production remained essentially unchanged in the first nine months of 2019 with primary production (electrolytic and electro-winning) declining by 0.4 per cent and secondary production (from scrap) increasing by 1.6 per cent. World refined production growth was constrained owing to several constraints. A 30 per cent decrease in Chilean electrolytic refined output due to temporary smelter shutdowns whilst undergoing upgrades to comply with new environmental regulations. Total Chilean refined production (including Electro-winning) declined by 11 per cent, a 35 per cent decrease in Zambian refined output due to power supply interruptions, smelter outages and temporary shutdown and the introduction on 1st January 2019 of a 5 per cent custom duty on copper concentrate imports constraining smelter feed. Reduction in output in Japan, Peru, the United States and a few European countries due to shutdowns of smelter owing to maintenance. However, these reductions were offset by growth in Chinese output and by increases in countries recovering from production constraints in 2018 such as Australia, Brazil, Iran and Poland. On a regional basis, refined output is estimated to have increased in Asia (3.5 per cent) and in Oceania (11 per cent) but declined, in North America (-2.5 per cent), in Latin America (-8 per cent), in Africa (-9 per cent) and in Europe (-2.5 per cent).

There are a number of compelling reasons to expect a major bullmarket in copper. For a start we have seen continuing robust consumption from China while mine supply has stagnated. Secondly, demand for copper for use in Solar and Wind alternative electricity generation is expected to grow steadily in coming years, especially Solar, and these technologies require the use of a lot of copper. A transition to cleaner energy will take centre stage in metals over the coming years, requiring significantly larger amounts of copper, nickel and other metals.Thirdly, due to onerous new legislation, electric vehicles are expected to take over from petrol driven vehicles on a grand scale as part of a master plan to eventually eliminate private transport for the masses, meaning the lower and most of the middle class, and all these millions of transitional electric vehicles will create enormous demand for copper. It is most likely that when the shift from petrol to electric propulsion occurs, it will still result in a massive increase in demand for copper, as the number of electric vehicles in existence will explode in the interim phase before the prices of electric vehicles are ramped up. With the easing trade tensions can boost global GDP growth. The International Monetary Fund also expects emerging markets to grow at 4.6% in 2020 from 3.9% in 2019. If growth in China and India accelerates, the demand for copper will ensure that the commodity continues to move higher. This will be positive for FCX as EBITDA margin will expand along with growth in free cash flows leading to overall recovery in the global markets.

Thus, trade disruption remains the number one risk that could threaten the economic recovery and increase the chance of a recession in late 2020. We still believe that both United States and China have incentives to improve trade relations. President Donald Trump wants to keep stock markets buoyantahead of his 2020 re-election campaign, which means he needs to lift the economic uncertainty that trade tensions pose. However, the unpredictability of the current US administration makes it difficult to guarantee that trade talks will continue moving in the right direction.  Any re-escalation in trade tensions may cause fatal blow to economic activity and global equity markets.Another risk that could lead to a similar scenario is a central bank policy error. After the Fed tightened financial conditions in 2018, we saw one of the most turbulent sell-offs in financial markets in years. So, central banks in 2020 will have little room for error.

Dr. Hanish Kumar Sinha
Deputy Vice President - Research & Development
National Bulk Handling Corporation Pvt. Ltd.

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