Copper to Gain More Positive Tractions in 2018

Posted on 5th January 2018 by Hanish Kumar Sinha, Head - Research & Development, NBHC

The year 2017 has been quite outstanding for copper and other base metals. In the year 2017, copper demand, especially from China, turned out to be better than expected. China’s housing market proved resilient, while global economic growth also strengthened over the year. There were more surprises on the supply side. Earlier this year, two of the biggest copper mines, Escondida in Chile and Grasberg in Indonesia both experienced prolonged disruptions, while other producers also suffered cutbacks due to declining ore grades and weather factors. Copper exceeded expectations in 2017 as demand proved stronger than expected while supply suffered some major disruptions. LME copper prices were up 26 per cent year to date, reaching $6906/MT on 19th December.

On the supply side, while labour disputes and weather factors continue to pose a risk to supply going forward, we do not expect supply cuts to be as severe as what we’ve seen earlier this year. Combined with capacity restarts in the Democratic Republic of Congo and Zambia and to a lesser extent additional output from new projects and expansions, we expect to see world mine production increase slightly in 2018. Better availability of copper concentrates should see refined production increase as well in 2018. That will however be limited to some extent by China’s recent ban on scrap imports.World mine production is estimated to have declined by around 2.5 per cent in the first nine months of 2017, with concentrate production declining by 1.7 per cent and solvent extraction-electro-winning declining by around 5 per cent. The decline in world mine production was mainly due to a 4 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 52 per cent, 18 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 18 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,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 34 per cent and 4 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. Brazil, 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 3.5 per cent, in Asia by 2 per cent and in Oceania by 2 per cent while increasing in Europe (including Russia) by 2.5 per cent. World refined production is estimated to have grown modestly by 0.5 per cent in the first nine months of 2017 with primary production (electrolytic and electro-winning) declining by 1.3 per cent and secondary production (from scrap) increasing by 9.5 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 (7.5 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 (-3.7 per cent) and the United States (-8.5 per cent). On a regional basis, refined output is estimated to have increased in Asia (4 per cent) and in Europe (4 per cent) while declining in Africa (2 per cent), in the Americas (9 per cent) and in Oceania (8.5 per cent).

World apparent refined usage is estimated to have increased modestly by around 0.5 per cent in the first nine months of 2017. Improved scrap supply is constraining world refined copper usage growth globally in 2017. Preliminary data indicates that world ex-China usage might have increased by about 1per cent.However, China apparent usage (currently representing almost 50 per cent of world refined usage) remained essentially unchanged. Chinese apparent usage (excluding changes in unreported stocks) remained essentially unchanged as although refined copper production increased by 6 per cent, net imports of refined copper declined by 13 per cent. Among other major copper using countries, usage increased in India and Japan but declined in the United States, Germany and South Korea.The demand outlook for the red metal remains positive with expectations of a recovery in Chinese demand. This has been driven by President Trump’s plans to boost spending on infrastructure and construction, depreciation of the US dollar and the rising use of copper in electric vehicles and other electrical applications.The primary boost is expected to come from the recovery of the Chinese economy as the country continues its transitions towards a domestic demand driven economy.

The global copper market is eyeing at China’s ambitious USD 4 Trillion One Belt, One Road (OBOR) infrastructure development plan thataims at developing trade corridors across Asia, Europe, Africa and Middle East which would further drive demand.Other notable factors which are expected to drive the demand of the red metal include the rising production of electric cars, which use four times the amount of copper than a vehicle with a traditional combustion engine. According to International Copper Association, copper demand from electric vehicles is expected to be nine times higher by 2027 from the current level of 185,000 MT.Owing to the above expansion plan, the IMF has recently revised China’s GDP growth forecast for 2017 and 2018 to 6.7 per cent and 6.4 per cent respectively, reflecting the high levels of public investment in the country which augurs well for the steady and continued copper demand in the country.

Copper is currently in a supply deficit which is likely to increase over the next three years. As the global copper deficit intensifies and the price outlook remains strong, miners can be seen to focus on the expansion and development of new projects to meet increased demand. Production from brownfield expansions at Escondida in Chile, the restart of Glencore’s African copper operations, First Quantum Minerals’ new Cobre Panama mine and OZ Minerals’ construction of the Carrapateena copper mine in South Australia are expected to come online and increase output in the future. Prospects of a Chinese economic recovery, rising demand from electric vehicle manufacturers and US infrastructure plans announced following the election of President Trump are all driving copper demand. Meanwhile, labour disruptions, declining ore grades and a lack of new capacity are constricting supply, thereby resulting in a tightening market. Thus, we can see that irrespective of prospects of marginal increase in supply is on the cards, the supply deficit is expected expand further and leading to increased bullishness and it won’t be a surprise if we see new record high levels before the end of 2018.

Hanish Kumar Sinha
Head - Research & Development, NBHC
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