Trade War Trumped Copper amidst Positive Fundamentals

Posted on 10th December 2019 by Hanish Kumar Sinha, Deputy Vice President - Research & Development, NBHC

Copper fundamentals continue to look supportive, while the global slowdown, exacerbated by trade war, loomed high on major economies. Mixed signals came from the recent efforts on the U.S.-China "phase-one" trade deal to de-escalate a 17-month trade war and the investors are still largely cautious to move on with increased indecisiveness. The turn of events is changing much sooner than expected. In spite of the trade deal negotiations, the American president has eventually angered China by signing a bill supporting pro-democracy protesters in Hong Kong. Currently, there is growing concerned that global troubles could drag down the copper market though there are immensely low inventories across the copper supply chain. Declines in warehouse stocks reflect a risk reduction strategy by consumers who have switched to making hand-to-mouth purchases that avoid building any inventories.

While prospects for an interim deal remain cloudy, new rounds of U.S. tariffs are set to kick in on Dec. 15, covering about $156 billion of Chinese imports. Copper is one of the primary commodities in the crosshairs of the trade war between the US and China. The dispute has weighed heavily on the Chinese economy. Combined stocks of on-warrant copper in London Metal Exchange and Shanghai exchange warehouses have declined 50.5 per cent since mid-August metal buyers have slowed replenishment rates. Once the market has certainty about the trade and tariff outlook - the tariff war inches closes to end - the psychology will completely flip, because everyone will want to restock and this situation may then favour the fundamentals and a snap rally could be triggered.

According to the US Geological Survey to date, roughly 700 million MT (or more than 1.5 trillion pounds) of copper have been produced around the world. This would fit into a cube measuring about 430 meters on a side and at today's price would be worth more than $4 trillion. As per the USGS estimates identified deposits contain an estimated 2.1 billion MT of copper with porphyry deposits accounting for 1.8 billion MT. That brings the total amount of discovered copper to 2.8 billion MT. This would fit into a cube measuring 680 meters on a side. Of the identified copper that has yet to be taken out of the ground, about 65 per cent is found in just five countries: Chile, Australia, Peru, Mexico, and the United States.

Amidst increased uncertainties of trade situations and global economic slowdown, the world mine production declined by about 0.5 per cent in the first eight months of 2019, with concentrate production remaining essentially unchanged and solvent extraction-electro-winning (SX-EW) declined by 1.5 per cent. Reduced output in major producing countries had offset growth in other countries. Production in Chile, the world's biggest copper mine producing country, declined by 0.5 per cent mainly due to lower copper head grades and a few production disruptions that occurred early in the year. Indonesian output declined by 51 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 2 per cent as consequence of temporary suspensions at SX-EW mines, reductions in planned production and few operational constraints. Production in few major copper mine producing countries, including Australia, China, Mexico, Peru and the United States increased due to improved grades and recovery from constrained output in 2018. Panama started mining copper earlier this year, with the commissioning of the Cobre de Panama mine, and is the biggest contributor to world mine production growth in the first eight months of 2019. On a regional basis, mine production is estimated to have increased by around 3.6 per cent in North America, 1.3 per cent in Latin America and 8 per cent in Oceania but declined by 7 per cent in Asia, 1.2 per cent in Africa and 2.5 per cent in Europe.

The world refined production remained essentially unchanged in the first eight months of 2019 with primary production (electrolytic and electro-winning) declining by 0.3 per cent and secondary production (from scrap) increasing by 1.8 per cent. World refined production growth was constrained as a consequence of the developments mentioned ahead. A 32 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 12 per cent. A 33 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. A decline of 25 per cent in India's production was negatively impacted by the shutdown of Vedanta's Tuticorin smelter in April 2018. Reduced output in Japan, Peru, the United States and a few European countries due to smelter maintenance shutdowns have resulted in declining supplies. 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 (15 per cent) but declined, in North America (-3 per cent), in Latin America (-9.5 per cent), in Africa (-8 per cent) and in Europe (-1 per cent).

The other major chunk of the copper supply comes from copper scrap which has gradually made its entry in the lesser developed countries as China had banned imports of lower-grade Category Seven copper from the start of 2019 with full-year volumes equating to about 50 per cent of actual imports in 2019. Scrap shortages forced Chinese consumers to source copper ingots that scrap or secondary by-products are melted into from markets domestically and globally, to help support their operations. The long-anticipated standards for secondary copper would come into force in the second quarter of 2020 at the latest, allowing materials that meet the standards to enter China without import quota restrictions, even after "solid waste" scrap imports is completely banned. Central research Unit forecasts 2020 refined copper consumption in the US to grow by 0.5 per cent to 1.64 million MT, Canada by 0.1 per cent to 202,000 MT and Mexico by 1.2 per cent to 447,000 MT. Globally, copper demand is seen growing 1.4 per cent with world copper demand excluding China growing by 0.9 per cent. Demand growth of about 1.8 per cent is still possible in China, which is representing 50 per cent of global copper consumption. An "exponential rise in demand" will be fuelled by EV production and sales which are expected to increase from 2 million units in 2018 to 21 million units by 2030. The average petrol engine vehicle requires 20 kg of copper, a hybrid 40 kg, and a plug-in EV 109 kg, while the cars of the future will need as much as 163 kg of the metal. It is forecast that by 2035, there could be 140 million EVs on the road (or 8 per cent of the global fleet) and manufacturers could require 8.5 million MT a year of additional copper, or about a third extra on top of current total global copper demand. Apart from it the massive infrastructural development plans, push towards renewable energy sources and cleaner environment in several developing and lesser developed countries is expected to sustain the demand for copper in the long run and keep long term investment sentiments intact.

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

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