Decisive Positivity is Likely to Prevail in Copper for 2019

Posted on 6th March 2019 by Hanish Kumar Sinha, Deputy Vice President - Research & Development, NBHC

Amidst reports of easing economic tariff war between US & China (Extension on imposition of fresh tariff beyond March), expectation of decline in supply and continued robust demand prospect despite marginal slowdown of Chinese growth numbers is expected to keep the copper prices buoyant for entire 2019. The US dollar's performance played a significant role in commodity price direction throughout 2018 and is likely to do so again this year. The US dollar should continue to weaken as the US Federal Reserve holds off on rate increases. Not only will this support commodity prices, including copper, but it will also be good for emerging markets. Moreover, the global market is keenly concentrating on the reports that Chinese government's is likely to revisit its policy regarding scrap copper. In 2018, tightness in scrap was partly attributable to the upward revision of refined consumption numbers. Despite the potential upside again in 2019, any slowdown in the Chinese economy could cap that country's requirements.

The disruptions to the supply side are they mine or smelter stoppages will provide upside support to prices, given that the copper market is not flush with visible inventories, which are currently at levels last seen back in January 2015. Following a near - 3 per cent increase in mine production during 2018 to 20.7 million MT; it is expected that this rate would slowdown in 2019, with growth of only 0.3 per cent after applying a 5 per cent disruption allowance. Supply increases in 2018 were driven by higher contributions from existing base case mines; between them, Grasberg and Escondida produced around 430 thousand MT more last year, close to 65 per cent of the global net increase on 2017. Despite the start-up of greenfield projects such as Cobre Panama, Mirador and Carrapateena in 2019, their contribution is likely to be be more than offset by lower production from existing mines, and by Grasberg in particular.This Indonesian operation is expected to deliver less than half the amount of copper that it produced in 2018, as it transitions from the end of open pit mining to additional contributions from underground block caving.

On the supply front the concentrate market is also expected to be tightened through the 2019. There are concerns that smelters may continue to falter through the first months of 2019. While there are risks that the issues at Pasar, Aurubis and Gresik are not resolved, there are also uncertainties in Chile regarding new air quality laws, introduced on 12th December, 2018. All Chilean copper smelters now have to comply with the latest environmental regulation. Codelco's Chuquicamata and Potrerillos now look set to be under extended maintenance in 2019. We understand the downtime at Potrerillos could be anywhere up to 6 months.The introduction of a 5% duty on concentrates imported into Zambia could materially reduce copper production, particularly at KCM's Nchanga smelter and NFC's Chambishi operation, both of whom rely on concentrates from the DRC to bolster blister/anode production.Thus the Supply side is expected to be squeezed up leading to extended support to the copper prices. Globally, the refined production is estimated to have increased by 1.5 per cent in the first eleven months of 2018 with primary production (electrolytic and electro-winning) increasing by around 2 per cent and secondary production (from scrap) remaining flat. World growth was constrained by an unusually high frequency of smelter disruptions and temporary shutdowns for technical upgrades/modernizations. The main contributor to the growth in world refined production was China due to its continued expansion of capacity. A rise of 2 per cent in Chile was a consequence of a recovery from 2017 when output was negatively impacted by a series of smelter maintenance shutdowns. However, despite this increase, Chilean output over the first eleven months of 2018 was still 6 per cent lower than the same period of 2016. Japanese output rose by 6.5 per cent recovering from reduced output in 2017 when a major smelter undertook extended maintenance. Increases in electro-winning (SX-EW) output in the DRC and Zambia also contributed to world refined production growth. Overall growth was partially offset by a 34 per cent decline in India's output due to the shutdown of Vedanta's Tuticorin smelter in April and declines in Indonesia, the Philippines and Poland as a consequence of maintenance shutdowns and operational issues. On a regional basis, refined output is estimated to have increased in Africa (10 per cent), Asia (1.5 per cent) and Latin America (2 per cent) whilst remaining more or less unchanged in Europe and Oceania and declining in North America (-2.5 per cent).

Copper scrap market is already showing signs of tightening and is heading for one of the biggest uncertainties for the Chinese copper market in 2019. Category 6 copper scrap will be reclassified as a 'restricted import good' as of 1st July this year, which means that importers will need to obtain an import quota from the government. As we go to print, details are still to be confirmed as to whether some category 6 copper scrap components will be exempt, and also how limited import quotas will be during second half of 2019. However, the impact on scrap supply in China will be negative regardless of the details. It is expected that demand for refined copper as a share of total consumption in China will be proportionately higher. Refined copper supply from secondary producers is likely to be lower resulting in increased import of cathode, blister and/or concentrates by China. Thus, much would be depended onhow refineries in the rest of world will be able to raise their production given the current issues around Indian and Chilean smelters and refineries.

On the Positive side, China has elevated the adoption of new "Phase 6" emissions standards under its anti-pollution "Blue Sky Defence" action plan. Just as we're seeing in parts of Europe right now, China will soon begin banning the production of the most polluting diesel engines. This is likely to provide significant boost to the electric vehicles (EVs). Currently, China accounts for 60 percent of global EV sales and it is expected that in about a decade, the Asian country will account for nearly 40 percent of the global EV market, followed by Europe (26 percent) and the U.S. (20 percent). At the same time, strong grid investment driven by the government's stimulus package, as well as improving housing completions driven by positive housing starts since 2016, will offer some support to growth.Fresh incentive programs for both the auto and home appliance sectors are in discussion according to a recent statement from the government. This may yet offer some support to total copper consumption within both of these sectors. Moreover, Chinese the world's largest copper consumer's GDP growth is not falling, but is simply slightly behind expectations on a percentage basis which is not expected to pull down the overall demand which has been ever improving in quantum. But, going forward, even if we see GDP growth drop significantly on a percentage basis, there's still a lot of copper that needs to go to China just to maintain their current demand.

Hanish Kumar Sinha
Deputy Vice President, Research & Development, NBHC
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