Copper Going through Extended Consolidation

Posted on 6th December 2017 by Hanish Kumar Sinha, Head - Research & Development, NBHC

Copper market has been consolidating in the broad range on the lower side from the highs. After surging in response to strong Chinese economic data earlier this year, some investors now worry that a slowdown in China - which accounts for ~50 per cent of the world’s copper consumption - could weigh on prices moving forward, and has prompted some short term investors to take chips of the cliff. A stronger dollar also is weighing on prices by making copper and other dollar-denominated commodities more expensive for overseas buyers.

On the supply front, for the copper market 2017 will record the first decline in copper mine supply since 2005 as a result of disruptions at the world's largest copper operations including Escondida in Chile, a joint venture between Rio Tinto and BHP, and Grasberg in Indonesia, owned by Freeport McMoRan. It is expected that in 2017, the supply of primary copper would dip by 3.5 per cent and then recover in 2018 by 2.8 per cent. World mine production is estimated to have declined by around 2.2 per cent in the first eight months of 2017, with concentrate production declining by around 1.5 per cent and solvent extraction-electro- winning SX-EW declining by around 5 per cent. The decline in world mine production was mainly due to a 5 per cent decline in production in Chile, the world’s biggest copper mine producing country, negatively affected by the strike at the Escondida mine and lower output from Codelco mines, a decline in Argentina, Canada and Mongolia concentrates production of 50 per cent, 19 per cent and 18 per cent, respectively, mainly due to lower grades in planned mining sequencing and Argentina’s Alumbrera mine approaching end of life, a 15 per cent decline in Indonesian concentrate production as output was constrained by a temporary ban on concentrate exports that started in January and ended in April and a 11 per cent decline in production in the United States mainly due to lower ore grades, reduced mining rates and unfavourable weather conditions at the beginning of the year. However these reductions in output were partially offset by 35 per cent and 5 per cent increases in Kazakhstan and Peruvian concentrate output, respectively, with both countries benefitting from new and expanded capacity that was not yet fully available in the same period of last year. Mexico, Myanmar, Spain and Sweden also contributed to world growth. On a regional basis, mine production is estimated to have declined in Africa by 1.5 per cent, in the Americas by 4 per cent and in Oceania by 2 per cent while increasing in Asia by 1 per cent and in Europe (including Russia) by 2 per cent.

World refined production is estimated to have remained essentially unchanged in the first eight months of 2017 with primary production (electrolytic and electro-winning) declining by 1.5 per cent and secondary production (from scrap) increasing by 10 per cent. Increased availability of scrap allowed world secondary refined production to increase, notably in China. The main contributor to growth in world refined production was China (increase of 6 per cent), followed by India (8 per cent) and some EU countries recovering from maintenances shutdowns in 2016. However, overall growth was offset by a 10 per cent decline in Chile, the second largest refined copper producer, where both primary electrolytic refined production and electro-winning production declined. Production also declined in the third and fourth world leading refined copper producers, namely, Japan (-3.5 per cent) and the United States (-9 per cent).

The rise and the fall in Chinese Copper demand is seen as a health barometer for the global market. Although China’s unwrought copper imports have fallen on a yearly basis, the fall is coming from a relatively high base. While China’s unwrought copper imports have fallen on a year-to- date basis, they have raised YoY in the last two months. China’s copper concentrate imports have risen ~1.8 per cent YoY in the first eight months of 2017. China imported 330,000 MT of unwrought copper and copper products in October 2017 in contrast to 290,000 MT in the corresponding month last year. Although China’s unwrought copper imports rose on a yearly basis in October, it fell 23.2 per cent as compared to September to their lowest level since April 2017. China also imports copper concentrates that are processed in the country. Last month, China imported 1.4 million MT of copper ores and concentrates, which is almost the same as compared to October 2016. However, imports fell as compared to September. China’s dismal October copper imports could provide a lifeline to copper bears. It’s worth noting that copper came under selling pressure in September after China’s copper imports data disappointed markets. If copper prices react negatively to China’s October copper imports data, miners like Freeport-McMoRan (FCX), Glencore (GLEN-L), and Antofagasta (ANTO) could also come under pressure.

Important development in Chines scrap policy if implemented may affect the market in a big way. China has made a series of policy changes this year under current government including significant reductions in the categories and volumes of waste imports. From January 2018, trading firms are no longer granted import quotas because all scrap business must occur between overseas sellers and domestic end-users directly. In addition, the import of category 7 copper scrap will be reduced in 2018 and banned from 2019. China also, intends to adopt thresholds of 1 per cent for impurities allowed in non-ferrous scrap imports to China and 0.5 per cent for ferrous scrap imports, it announced to the World Trade Organization (WTO) on November 17. The changes would cause dislocation and disruption in copper flows because scrap supply generated by mature economies would have to find a new home while Chinese consumers look for alternative options, including importing more concentrates and refined copper. In addition financial tightening is also expected to squeeze the fund as The Chinese economy, including the metals industry, is highly focused on deleveraging going into next year, which should see more capacity cuts among unprofitable smelters.

In spite of all stagnation in demand and import figures from China, the growth in the manufacturing sector still hold the key to the copper future. Around the world, manufacturing sectors are performing well. Chinese growth is exceeding expectations. And with the recent congress of the Communist Party in China, the outlook for Chinese growth continues to be positive. The growth is also continuing in Europe and US. Vehicle electrification is considered to be a bullish driver for global copper demand. According to the International Copper Association, 23 kg of copper is used in internal combustion engine vehicles. On average, a hybrid electric vehicle uses 40 kg of copper. Copper content is even higher in plug-in hybrid electric vehicles and battery electric vehicles, at 60 kg and 83 kg, respectively. The growing shift toward electric cars, pushed by governments around the world, is expected to support copper demand. Not only is copper content higher in electric vehicles, but also these vehicles would also require an expanded charging infrastructure as the electric car fleet grows globally.

Hanish Kumar Sinha
Head - Research & Development, National Bulk Handling Corporation Pvt. Ltd.
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