Investor Keenly Awaits Improvement in Chinese Demand

Posted on 14th July 2017 by Hanish Kumar Sinha, Head - Research & Development, NBHC

The dwindling feature of copper trade continues to linger on amidst lack of concrete demand and unstable global economic developments. The base support for the improvement in the prices is coming from the supply side which is being curtailed by mine strikes and significant production cuts. The price movement has been range bound in the current period. After hitting historic highs in February 2011 at over $10,000 a metric ton, copper prices went on a prolonged slide, reaching seven-year lows around $4,330 a ton in January 2015 due to slowing Chinese demand growth and burgeoning supply as producers ramped up output in expectations of the demand growth witnessed from 2006-2011.However, Chinese demand growth slowed and along with it the prices have also slumped. As per the analysis of the supply disruptions, the copper prices is expected to move above $6,000 a ton in the second half of 2017, with peaks of close to $7,000 a ton before the end of the year, and above $8,000 a ton before the end of 2020.

The analysis of the supply side indicates that World mine production is estimated to have declined by around 3.5 per cent in the first quarter of 2017, with concentrate production declining by around 3 per cent and solvent extraction-electro-winning (SX-EW) declining by 6 per cent. The decline in world mine production was mainly due to a 14 per cent decline in production in Chile, the world's biggest copper mine producing country, negatively affected by the strike at Escondida mine and lower output from Codelco mines, a decline in Canada and Mongolia concentrates production of 18 per cent and 23 per cent, respectively, mainly due to lower grades in planned mining sequencing and a 10 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. However overall decline was partially offset by a 17 per cent and 9 per cent rise in Mexican (concentrate and SX-EW) 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. On a regional basis, production rose by 5 per cent in Europe (including Russia) and 9 per cent in Oceania while declining by 7 per cent in the Americas and 5 per cent in Africa, and remaining essentially unchanged in Asia. World refined production is estimated to have remained essentially unchanged in the first quarter of 2017 with primary production (electrolytic and electro-winning) declining by 2 per cent and secondary production (from scrap) increasing by 13 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 7 per cent), followed by Mexico (12 per cent) where expanded SX-EW capacity contributed to refined production growth. However, overall growth was partially offset by an 18 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 (in electrolytic production from concentrates) and in the United States (mainly in electro-winning output). On a regional basis, refined output is estimated to have increased in Asia (5 per cent), in Africa (2 per cent) and in Europe (including Russia) (2 per cent) while declining in the Americas (12 per cent) and in Oceania (5 per cent).

World apparent refined usage is estimated to have declined by around 3 per cent in the first quarter of 2017. Preliminary data indicates that although world ex-China usage might have grown by around 1 per cent, growth was more than offset by a 6.5 per cent decline in Chinese apparent demand. Chinese apparent demand (excluding changes in unreported stocks) declined by 6.5 per cent because although refined copper production increased by 7 per cent, net imports of refined copper declined by 35 per cent. Among other major copper using countries, usage increased in India, Japan and Taiwan but declined in the United States and Germany. On a regional basis, usage is estimated to have declined in all regions: in Africa by 1 per cent, in Asia by 3 per cent (when excluding China, Asia usage increased by 7 per cent), in the Americas by 1 per cent and in Europe by 5 per cent.

Chinese demand has improved during June, and, consequently, prices increased this month.Automotive sales within China have risen from April to May, which has provided a short-term lift in copper prices. However, if analyzing automotive sales compared to last year's data, sales have only held steady; therefore, a significantgrowth spike in the automotive sector or increased demand for copper and the subsequent lift in copper prices is not sustaining in the current period.

Major development in the global market supporting the copper price for the short term are: the increase in warrant copper inventories in LME warehouses - those not earmarked for shipment and available to investors - has soared by 47 per cent to 213,900 tonnes since June 28 after inflows into mostly Asian depots and significant decline in copper prices was offset by news that Chilean miner Antofagasta was facing potential strikes from workers and supervisors at two of its mines as contract talks continue.The combined annual production at both Chilean mines is 160,000 tonnes of copper. The currency market too has supported the copper demand as a softer dollar has helped underpin prices as it makes dollar-denominated products cheaper for non-US buyers, potentially boosting demand. Increased imports by China -- responsible for about 45 per cent of the metal's global consumption - is also another factor in the price surge.Official customs data showed the country's refined copper imports in May firmed 30% to 390,000 tonnes when compared with the previous month.Especially in the off-season for copper, implied markets had overestimated the slowdown in China's economic growth and sluggish domestic demand and the pessimism in the investment sentiment is likely to go off soon amidst boost in the demand in the coming months.

In spite of the short term indecisiveness, the future of the copper is bullish for the long term investors. Copper consumption has steadily grown along with the global economy, and it is expected to continue to grow as greater numbers of people have access to electricity, plumbing and modern appliances. The World Bank, for example, has launched lending for rural electrification in the Sub-Saharan Sahel region of Africa with the goal of providing power to an additional 60 million people who are without electricity today. This venture would require untold amounts of copper for implementation, yet this expansion is still dwarfed by the current scale and rate of rural electrification in India and China.Another factor in the increasing demand for copper is that many industrialized nations also have aging power grids. Improvements and capacity expansion of grids in the US, Europe, Japan and Australia is likely to continue consuming more and more of copper.

Hanish Kumar Sinha
Head - Research & Development, NBHC
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