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Monday, 4 September 2017

NBHC’s First Kharif Crop Estimates for 2017-18

With the Kharif season almost on the verge of completion we at NBHC are releasing our 1st Kharif Crop Estimate - 2017-18. As per our analysis and industry’s feedback on the sowing progress and the status of the current crop, the total Kharif Cereals production is likely to decline marginally by 1.72 per cent. For the current season the monsoon had arrived timely in good quantum but the distribution has not been uniform. The country has been affected by heavy rains in some states leading to massive flooding while the other states are dealing with significantly deficient and draught like situations. Based on the above conditions we fell that the total Kharif crop production scenario for the year 2017-18 would turn out to be as explained in table given below.   
Rice is expected to show a marginal Improvement in area by 2.84 per cent and a fall of 0.14 per cent in production over last year owing to wide spread rains in major paddy growing areas. Maize is the other cereal crop with significant decline in area as well as production. The area is expected to decline marginally by 1.17 per cent and the production is expected to decline by 7.94 per cent to 17.71 Million MT as major stretch of maize producing areas in major states are experiencing deficient rainfall situations. Maximum Decline is expected in Small Millets whose production is expected to fall by 12.54 per cent while its area is likely to shrink by 27.88%. Lack of remunerative income has led Jowar & Bajra farmers to shift their cropping pattern to other cash crops.   
In the pulses sector, the increased positive focus of the government was clearly visible over the last two years. In the pulses growing states of Madhya Pradesh, Karnataka, Andhra Pradesh and Telangana the production is expected to be marginally affected by the lack of rains in the growing areas. We expect the area under Tur, Moong, Urad and Kulthi to increase sharply by 11.41 per cent, 8.86 per cent, 17.10 per cent and 3.82 per cent respectively but the production is not expected to follow the same path owing to adverse weather situations developing in major growing areas. Overall, the total Kharif pulses production is likely to decline by 9.51 per cent over last year with maximum decline expected in Moong (17.15 per cent) flowed by Urad (13.11 per cent) and Tur (12.40 per cent).

The oil seed sector is likely to see a marginal decline in production by 12.43 per cent. Maximum Decline of 17.98 per cent in production is expected in case of soybean followed by 8.28 per cent production decline in Groundnut.
In this current monsoon season, the cash crop section is likely to show an overall positive growth in terms of production. In sugarcane, the production is likely to increase by 14.81 per cent while in cotton the production is likely to decline by 3.98 per cent.


Monday, 7 August 2017

Copper Market Shows Signs of Upsurge amidst Chinese Support

After months of stagnation the market has shown marginal signs of improvement amidst support from global supply squeeze, Chinese demand and weakening Dollar. Disruptions to copper shipments from Canada and Chile have undermined expectations for rising global copper supplies in the second half of the year, cutting the fees that smelters charge miners to process metal. Moreover, An estimated 5,000 workers at the giant Grasberg copper mine operated by Freeport-McMoRan Inc's Indonesian unit will extend their strike for a fourth month in a dispute over layoffs and employment terms. Growth in China's services sector slowed in July, a survey showed on recently, but data earlier showed that the manufacturing grew strongly, underpinning demand for metals. Expectations of stronger demand from Chinese stainless steel mills and concerns over supplies from top nickel ore exporter the Philippines have boosted the metal. The weaker dollar is another big tailwind for the industrial metal. The dollar index was down 2.9 percent in July, and copper futures for September were up 6.7 percent for the month. The U.S. dollar laboured at a 13-month low against a basket of currencies, making dollar-denominated commodities cheaper for holders of other currencies and potentially boosting demand. 

The in-depth analysis of the supply disruptions could be adhered to the continued strikes in major copper mines across the world. Unionized workers at mines in Peru, the world's second biggest copper producer, started a nationwide strike in Later half of July 2017 to protest the government's proposed labor reforms. The stoppage has likely curbed copper production at some of the country's largest mines, including BHP Billiton Plc's, Glencore Plc's Antamina, Freeport-McMoRan Inc's Cerro Verde, Southern Copper Corp's Cuajone and Toquepala. Zaldívar, an open-pit, heap-leach mine, produced 102,000 tonnes of copper in 2016. During the first quarter operator Antofagasta said production rose 7.3% to 26,600 tonnesWorkers at the Zaldívar copper mine in Chile signed a three-year wage deal with operator Antofagasta, the union confirmed. Chile is responsible for some 30% of global output. The world's largest copper mine Escondida was hit by a 43-day strike in February-March this year that crimped production by around 120,000 tonnes. The Chile’s Caserones mine, which has been behind schedule ever since it began producing in May 2014, had to halt operations for three weeks following a blackout caused by heavy snow and rain in May 2017. It’s been trying to get back on track since then.

On the supply side, World mine production is estimated to have declined by around 3.5 per cent in the first four months of 2017, with concentrate production declining by around 3 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 12 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 19 per cent and 22 per cent, respectively, mainly due to lower grades in planned mining sequencing and a 14 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 13 per cent and 7 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 4 per cent in Europe (including Russia) and 7 per cent in Oceania while declining by 6 per cent in the Americas, 1.5 per cent in Asia and 4 per cent in Africa. World refined production is estimated to have remained essentially unchanged in the first four months of 2017 with primary production (electrolytic and electro-winning) declining by 2 per cent and secondary production (from scrap) increasing by 12 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 6.5 per cent), followed by Mexico (11 per cent) where expanded SX-EW capacity contributed to refined production growth. However, overall growth was partially offset by a 16 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 (4 per cent), in Africa (3 per cent) and in Europe (including Russia) (2 per cent) while declining in the Americas (10 per cent) and in Oceania (11 per cent).

World apparent refined usage is estimated to have declined by around 3 per cent in the first four months of 2017. Preliminary data indicates that although world ex-China usage might have grown slightly by around 0.5 per cent, growth was more than offset by a 7 per cent decline in Chinese apparent demand. Chinese apparent demand (excluding changes in unreported stocks) declined by 7 per cent because although refined copper production increased by 6.5 per cent, net imports of refined copper declined by 36 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 6 per cent.

Since, copper supply is set to under-perform demand for much of the next half decade. As the global economy departs from several years of stagnation, so too does the outlook for copper pricing. The combination of stronger than expected Chinese demand, a clear lack of visible copper inventory build, an end to cost deflation, and the U.S.-centric reflation story after the Trump election victory has sparked positive price momentum through the latter stages of 2016 and the first half of 2017. Copper is not iron ore, and it is not nearly as easy to find and produce. The current copper price does not support growing supplies, and it appears that some producers have begun to put their collective shovels down. In reality, the world needs another mega-project before 2020, and we just don't have one coming. The major deposits are, for the most part, found. $3.00 per pound will easily bring on plenty of supply, but again, my belief is it will be too late. My guess is that we start to see the shortage become obvious near the end of the first half of 2017. Prices will overshoot and what we saw during the China boom won't be out of the question. Moreover, China's construction contracts have continued a high rate of growth despite their economic slump, as have car sales. A lot of China's recent copper interest may lie in the aluminum vs copper wiring battle. They have been using a lot of the aluminum wire, because it is a very abundant metal with stable pricing running a fraction of that for copper. Thus, I feel that the positivity in the prices is likely to continue of the later half the 2017.

Monday, 10 July 2017

Investor Keenly Awaits Improvement in Chinese Demand

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 significant growth 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.

Wednesday, 21 June 2017

Short Term Optimism Fading Away Amidst Subdued Demand

Copper has rallied 40 per cent since January 2016, erasing all losses since May 2015. Investors have become increasingly optimistic about the metal’s prospects with speculative positioning in copper futures recently hitting an all-time high, more than 2.5 times its historic average. While the price of the metal remains 40 per cent below the peak reached in 2011, the supply disruption is keeping further fall of prices under check. The major driving factors maintaining the bullish phase in the copper market has been the several mine outages. Workers at the world’s largest copper mine, Escondida in Chile, have been on strike for three weeks and negotiations between unions, the mine operator (BHP Billiton) and government mediators have yet to be scheduled. The world second largest copper mine, Grasberg, operated by Freeport-McMoRan Inc., has also faced outages. The Indonesian government has not renewed Freeport’s copper ore export license that expired in February 2017. The Grasberg mine is also facing difficulty selling domestically, with PT Smelting (its sole domestic offtaker of copper concentrate) expected to be on strike until March. The Las Bambas mine in Peru has had its roads blocked by protestors who want the government to invest more in local infrastructure rather than just mine infrastructure. The three mines account for close to 12 per cent of global mine capacity. Outages in 2016 were usually low, accounting for less than 1 per cent of expected supply, but that could rise substantially in 2017 if the issues at Escondida, Grasberg and Las Bambas are not resolved soon. 

World mine production is estimated to have declined by around 2 per cent in the first two months of 2017, with concentrate production declining by around 1 per cent and solvent extraction-electro-winning (SX-EW) declining by 5 per cent. The major decline in the production can be associated to a 10 per cent decline in Chilean mine production negatively affected by the strike at Escondida mine and lower output from Codelco mines. The decline in Canada and Mongolia concentrates production are 19 per cent and 23 per cent, respectively, mainly due to lower grades in planned mining sequencing. The 10 per cent decline in Indonesian concentrate production was reported as output was constrained by a temporary ban on concentrate exports that started in January and ended in April. However, the overall decline was partially offset by an 18 per cent and 15 per cent rise in Mexican (concentrate and SX-EW) and Peruvian (concentrate) output, respectively, 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 10 per cent in Oceania while declining by 4 per cent in the Americas and 6 per cent in Africa, and remaining essentially unchanged in Asia. 

World refined production is estimated to have remained essentially unchanged in the first two months of 2017 with primary production (electrolytic and electro-winning) declining by 3 per cent and secondary production (from scrap) increasing by 11 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 4 per cent) followed by Mexico (14 per cent) where expanded SX-EW capacity contributed to refined production growth. However, overall growth was partially offset by a 16 per cent decline in Chile, the second world leading 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 (3 per cent), in Africa (2 per cent) and in Europe (including Russia) (1.5 per cent) while declining in the Americas (11 per cent) and in Oceania (5 per cent).

On the demand side, development in China remains in the forefront. The country now accounts for 49 per cent of the annual global copper consumption. In 2017, the demand should increase 4.6 per cent and reach 11.2 million MT. Other sales regions like Europe (EU-28: plus 0.2 per cent to 3.1 million MT) and the USA (plus 1.7 per cent to 1.8 million MT) admittedly cannot keep up, but they definitely are showing positive performance. The Chinese copper producer Jiangxi Copper estimates China’s copper demand in March 2017 at 822,500 MT, an increase of 22 per cent compared to February 2017 (676,500 MT). Stimuli came from the construction industry as well as heating and air conditioning. This is also reflected by the quarterly figures from the sectors. Investment in real estate rose by 9 per cent compared to the previous year to a converted value of US$ 289 billion. In April, the domestic sales of air conditioner units are expected to have risen to 7.85 million MT., an increase of 69.8 per cent over the previous year, and exports are expected to have risen by 5.4 per cent to 6.78 million MT. Furthermore, there is talk of a reduction in available cathode inventories. Cathode exports from China also decreased from 44,000 MT for March to 19,000 MT in April. There’s also the more fundamental argument that the use of imported copper for financing purposes is no longer playing a large role and that the reduced import volumes represent a return to normal conditions.

In the recent times the refined production is growing by 1.7 per cent and refined usage is only growing by 1 per cent. A 2 per cent increase in refined copper use would see the market remain in a deficit. Global manufacturing PMIs are at a 34-month high and could rise to a 6-year high this year. Given the growth in manufacturing and infrastructure spending, we believe that demand is likely to surpass the supply in the coming months. The development in China on the demand side is likely to keep the underlying strength in the market intact. Ahead of the 19th National Congress of the Communist Party of China to be held in September 2017, Chinese authorities would be seeking political stability which suggests that economic stimulus is likely to remain in play, which would favour continued spending on infrastructure and strong demand from the manufacturing sector. 

We should remain positive of the developments in China because the shift away from manufacturing and towards consumption is not necessarily negative for copper. For example, the copper intensity of cars will rise with the growth of electric vehicles. Regular cars contain approximately 20 Kg of copper. Electric vehicles consume about 80 Kg of copper. While electric vehicles account for less than 1 per cent of global sales, consensus estimates that it will rise to 4 per cent by 2025, proving an additional source of demand. Thus, we can say that all is not gloomy for the Copper Industry as it seems as on date, things have been improving as depicted by the glimpse of the expected growth in the Automobile Sector.

Tuesday, 9 May 2017

Copper Feeling Pressure of Extended Consolidation

The copper market has been trending downwards for the last couple of months and is feeling the pressure of the extended consolidation and lack of support from the global economic scenario. The copper prices are undergoing some downward pressure that is mainly related to policy revisions in Beijing. The short-term costs of borrowing presented the highest level in two years, which had a negative impact on the Chinese housing sector. The supply side continues to be robust amidst continued low demand, though the future of the demand scenario continues to post a bright future. In the latest Commodity Markets Outlook quarterly report, the World Bank estimates that copper prices will surge by 18 per cent in 2017. The analysis of the supply and the demand would better clarify the entire picture.

On the supply front, World mine production is estimated to have increased by around 4 per cent in January 2017 year on year, with concentrate production increasing by around 5 per cent and solvent extraction-electro-winning (SX-EW) declining by 2 per cent. The increase in world mine production has been mainly due to 25 per cent rise in Peruvian concentrate output that benefitted from new and expanded capacity that was not yet fully available in January 2016. However, January 2017 production was 6 per cent lower than the average production level in the 4th quarter 2016 and a 22 per cent increase in Mexican mine production (concentrate and SX-EW) that benefitted from expanded capacity brought on stream during last year. However overall growth was partially offset by a 2.5 per cent decline in production in Chile, the world’s biggest copper mine producer. No major supply disruption occurred in January in Chile and the decline was mainly due to a reduction in SX-EW output at some mines. Indonesian production was constrained by a temporary ban in concentrate exports that started during the month. On a regional basis, production rose by 3 per cent in the Americas, 6 per cent in Asia, 4 per cent in Europe and 10 per cent in Oceania while remaining essentially unchanged in Africa.

The details of Chinese Mine production show’s a price positive picture for the global market. According to the National Bureau of Statistics, China produced 764,000 MT of copper in March and achieved growth of 7.3 per cent in the first quarter of 2017 compared to the previous year’s period, with production for the first quarter totaling 2.13 million MT. There had been maintenance shutdowns at larger smelters such as Tongling, Yunnan and Shangdong Fangyuan. The higher copper price and good availability of raw materials are said to have been key to the high production level. Concentrate imports totaled 1.63 million MT in March 2017, compared to 1.37 million MT in March 2016. 

World refined production is estimated to have increased by about 2 per cent in January 2017 with primary production (Electrolytic and Electro-winning) remaining essentially unchanged and secondary production (from scrap) increasing by 13 per cent. Increased availability of scrap allowed world secondary refined production to increase, notably in China where the upward trend started in 4th quarter 2016. The main contributor to growth in world refined production was China (increase of 10 per cent) followed by Mexico (16 per cent) where expanded SX-EW capacity contributed to refined production growth. However, overall growth was partially offset by a 10 per cent decline in Chile, the second world leading refined copper producer, where both primary electrolytic refined production and electro-winning production declined. Production also declined in Japan (mainly 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 (6 per cent), in Africa (3 per cent) and in Europe (including Russia) (2 per cent) while declining in the Americas (6 per cent) and remaining essentially unchanged in Oceania.

In comparison to the rise in mine supply by 4 per cent the refined usage is estimated to have increased by around 1.8 per cent in January 2017. Preliminary January data indicates that world ex-China usage growth at 1.9 per cent was slightly higher than growth in Chinese apparent demand. Chinese apparent demand (excluding changes in unreported stocks) increased by only 1.7 per cent because although refined copper production increase by 10 per cent, net imports of refined copper declined by 17 per cent. Usage growth in other Asian countries as well as in some countries in Europe contributed to world growth. On a regional basis, usage is estimated to have increased by 2 per cent in Asia (when excluding China, Asia usage increased by 3.5 per cent) and by 3.5 per cent in Europe, while declining in all the other regions.

The recent supportive factor considered by the World Bank for sharp hike in the sentiments is the supply disruptions in the major mines. The world’s largest mines have had to cope with constraints in operations. In total, there was a 43-day strike at Escondida, which is the world’s largest copper mine. This strike ended without resolution in the end of March 2017. Furthermore, the Indonesian government implemented export policy restrictions in January 2017 that included the implementation of rules, which put restrictions on copper exports in order to give a boost to its’ inland refinery production. Consequently, production at Grasberg, which is the world’s second largest-mine, was stopped. Lastly, there was a flood in Peru, which is the world’s second largest copper producer. This natural disaster had also a negative impact on production output.

Another factor working in copper’s favor is the copper/gold price ratio, which is currently hovering at 0.14. This is near to its all-time data set low of 0.10 last seen at the depths of the U.S. Housing bubble. Traditionally, anything below 0.15 has provided an extremely attractive price point on which to enter. Should the ratio revert to the mean between 0.2-0.25, at today’s gold prices, copper would be valued between $8,300-10,375 a MT, an incredible premium to today’s prices. The copper supply deficit expectation was slowly gaining traction in the investment community which likely to provide bottom hand support to the copper prices. As per some analysis, the copper supply may be coming into deficit for the first time in six years. 

Some word of caution is likely to flow in from BHP, the world's second-biggest listed copper miner which is planning to hike its annual exploration spending by 29 per cent this year, allocating nearly all its $900 million budget to finding new copper and oil deposits. It is looking for more mining in Chile, Peru, the US, Canada and South Australia, as well as eyeing new partnerships to boost its growth pipeline. The deficit is expected to emerge as grade declines, a rise in costs and a scarcity of high-quality future development opportunities are likely to constrain the industry’s ability to cheaply meet this demand growth. In the end, copper prices are undergoing some downward pressure that is mainly related to policy revisions in Beijing. The short-term costs of borrowing presented the highest level in two years, which had a negative impact on the Chinese housing sector. The Chinese housing sector takes around 50 per cent of the total copper demand coming from the country.

Friday, 7 April 2017

Lack of Sustained Support Keeps Copper Market in Doldrums

The continued weakness in the red metal is seen as an economic uncertainty in expansion of demand. Copper has been a volatile market for most of the past year. Beginning in January 2016, prices saw a slide following the reports of a soft landing for China’s economy. Copper is a key material used in industrial infrastructure, and China uses about 45 per cent of the world’s supply, so any kind of movement in their economic outlook is likely to be reflected in the price of copper around the world. The increased supply of copper against stable demand but low demand is continuously pressuring the copper market.

In 2016 world mine production is estimated to have increased by around 5 per cent, or 1 million MT, with concentrate production increasing by 7 per cent and solvent extraction-electro-winning (SX-EW) declining by 2 per cent. The increase in world mine production in 2016 was mainly due to a 38 per cent (650,000 MT Cu) rise in Peruvian concentrate output that benefitted from new and expanded capacity brought on stream in the last two years, a recovery in production levels in Canada, Indonesia and the United States, and expanded capacity in Mexico and low frequency of supply disruptions due to strikes, accidents or adverse weather conditions. However overall growth was partially offset by a 3.8 per cent (220,000 MT) decline in production in Chile, the world’s biggest copper mine producer, and a 4.5 per cent decline in DRC where output is being constrained by temporary production cuts. On a regional basis, production rose by 6 per cent in the Americas and 11.5 per cent in Asia but declined by 3.5 per cent in Africa while remaining essentially unchanged in Europe and Oceania World refined production is estimated to have increased by about 2.5 per cent (530,000 MT) in 2016 with primary production (Electrolytic and Electro-winning) increasing by 3 per cent and secondary production (from scrap) declining by 2 per cent. Increased availability of concentrates allowed world primary electrolytic refined production to increase by 4.5 per cent. The main contributor to growth in world refined production was China (increase of 6 per cent, or 470,000 MT), followed by the United States and Japan where production increased by 7 per cent and 5 per cent respectively and by Mexico (16 per cent) where expanded SX-EW capacity contributed to refined production growth. However, overall growth was partially offset by a 3 per cent decline in Chile, the second world leading refined copper producer, although primary electrolytic refined production increased by 4.5 per cent, electro-winning production declined by 6.5 per cent due to definitive / temporary closures of SX-EW mines. Production in the DRC and Zambia also declined by an aggregated 11 per cent mainly due to the impact of temporary production cuts. On a regional basis, refined output is estimated to have increased in the Americas (1 per cent) and Asia (6 per cent) while declining in Africa (10 per cent) and in Europe (including Russia) (2 per cent) and remaining essentially unchanged in Oceania.

Worldwide copper production continued to grow in 2016 as it has for all but three of the past 22 years. World copper production has increased 105 per cent since 1994, when the U.S. Geological Survey began estimating global output. While investment in copper mines has slowed significantly from the 2003-2013 to the recent times, the production is still climbing. Given the rebound in the price of copper, we estimate that mines, on average, are earning returns of over 20 per cent on an all-in cost basis, and that the cash margin of producing copper (ignoring overhead costs, depreciation and amortization of equipment) is around 60 per cent.

World apparent refined usage is estimated to have increased by around 2 per cent (430,000 MT) in 2016. Growth was mainly due to an increase in Chinese apparent demand as world usage excluding China is estimated to have increased by only 0.9 per cent. Chinese apparent demand (excluding changes in unreported stocks) increased by around 2.5 per cent based mainly on 6 per cent growth in refined production as in fact net imports of refined copper declined by 7.5 per cent. Usage in the United States and Japan, the second and third leading refined copper using countries, is down by 2 per cent and 2.5 per cent respectively. On a regional basis, usage is estimated to have increased by 3 per cent in Asia (when excluding China, Asia usage increased by 3 per cent) and by 2 per cent in Europe (by 1.5 per cent in the EU), while declining by 3 per cent in the Americas World refined copper balance for 2016 indicates a deficit of around 50,000 MT (including revisions to data previously presented). This is mainly because of a 2.5 per cent increase in Chinese apparent demand. In developing its global market balance, ICSG uses an apparent demand calculation for China that does not take into account changes in unreported stocks [State Reserve Bureau (SRB), producer, consumer, merchant/trader, bonded]. In 2016, the world refined copper balance adjusted for changes in Chinese bonded stocks indicates a deficit of around 42,000 MT. The refined copper market balance for the month of December 2016 showed a small surplus of around 20,000 MT.

On the price front, the upside rally in the price was supported by the fact that China’s economic growth rate stabilized, and even improved slightly. The election of Donald Trump as President had promised increased of fiscal stimulus and significant expansion in infrastructure. The strike at the Escondida mine in Chile which produces 5 per cent of the world’s copper also provided partial support. In the last couple of months, the above stimulus to price have once again given way to increased uncertainty in demand leading to surplus supplies owing to the ending of the workers strike at Escondida, the Trump agenda is running into trouble in Congress and the uncertainty on China’s being be able to boost or even maintain its growth rate. 

In spite of the gloom and uncertainty persisting in the market, the silver lining is noticed in the form of China showing some signs of recovering as more policy stimulus is introduced, at least judging by the rebound in the equity market. In the recently concluded Metal Bulletin’s Copper Conference, experts have opined prices are slightly elevated and given the stock rises, ample availability of copper cathodes and lower premiums but a move towards larger deficits should underpin prices later in the year. The overall outlook for copper seems mildly bullish but there is concern about the high level of copper cathodes stocks, which should be able to delay any impact of concentrate shortages. So there does not seem to be any need for consumers to chase prices higher.

Wednesday, 5 April 2017

Positive Consolidation in Copper Continue Amidst Increased Supply Disruptions

The copper market continues to consolidate in the tight range as fundamentals driving it has remained consistently docile. No major improvement has been noticed in the demand though the supply side continues to apply the pressure on the prices. Since election of Donald Trump super enthusiastic approach to US infrastructural and a wider positive attitude for risky assets has gone a bit too far pushing up the copper prices which has risen by about 15 per cent he pledged to increase spending on infrastructure in the last quarter of 2016, but since then lack of major thrust on the demand has failed to sustain the upsurge. The other economic activity in the global economies has also failed to support the copper prices. The major economic factors affecting the copper prices are movement in the Dollar index against other currencies, PMI data of China, US, Europe and Latin American countries. 

The market is still being pressured by abundance of supplies and lagging demand. World mine production is estimated to have increased by around 5 per cent (900,000 t) in the first eleven months of 2016 with concentrate production increasing by 7 per cent and solvent extraction-electro-winning (SX-EW) declining by 2 per cent. The increase in world mine production was mainly due to a 41 per cent (630,000 t Cu) rise in Peruvian concentrate output that is benefitting from new and expanded capacity brought on stream in the last two years. A recovery in production levels in Canada, Indonesia and the United States, and expanded capacity in Mexico, also contributed to world mine production growth. However overall growth was partially offset by a 4.3 per cent decline in production in Chile, the world’s biggest copper mine producer, and a 5.5 per cent decline in DRC where output is being constrained by temporary production cuts. On a regional basis, production rose by 6 per cent in the Americas and 10.5 per cent in Asia but decline d by 4 per cent in Africa while remaining essentially unchanged in Europe and Oceania. World refined production is estimated to have increased by about 2.5 per cent (500,000 t) in the first eleven months of 2016 with primary production (including Electro-winning) increasing by 3 per cent and secondary production (from scrap) declining by 1.5 per cent: The main contributor to growth was China (increase of 6 per cent), followed by the United States w here production increased by 10 per cent and Mexico (16 per cent) where expanded SX- EW capacity is contributing to refined production growth. Output in Chile and Japan, the second and third leading refined copper producers, declined by around 2 per cent and increased by about 5 per cent respectively. Production in the DRC and Zambia declined by an aggregated 12 per cent mainly due to the impact of temporary production cuts. On a regional basis, refined output is estimated to have increased in the Americas (2 per cent) and Asia (6 per cent) while declining in Africa (12 per cent) and in Europe (including Russia) (3 per cent) and remaining essentially unchanged in Oceania. 

The global miner BHP Billiton reported it’s planned to halt production at the Escondida mine in Chile (which holds a 57.5 per cent position) due to a workers strike since February. A strike at the world’s largest copper mine faces a critical phase this week as the union expects management to tempt workers with an offer that could end the stoppage in northern Chile. After 30 days of strike, on March 10, BHP Billiton Ltd.’s Escondida can legally make individual offers to workers. If it manages to convince more than half of the workforce, the union will have to concede defeat and end to the strike. On 6th March 2017, the strike at Escondida overtook the 25-day stoppage at the same mine in 2006, which at the time was the longest strike in at least a decade among Chile’s major copper mines. Other mine operators in Chile are watching the Escondida dispute closely as it is expected to set the tone for upcoming negotiations this year. If enough workers do yield, the union is ready to resort to an article of the existing labor code that allows workers to extend their expired contract for 18 months, negotiations would then resume under Chile’s new labor rules, which kick in on April 1 and guarantee existing benefits, which is one of the major sticking points in the dispute. This current disruption of production in Escondida is likely to support the prices in the coming days. Apart from Escondida, Issues in relation to export permits for copper mining in Indonesia further strained world supplies of copper. Freeport-McMoRan, the Phoenix-based mining company operating the Grasberg mine in Indonesia, is facing trouble in exporting copper out of the country due to a ban on ore concentrate exports imposed by the Indonesian government in January 2017.

World apparent refined usage is estimated to have increased by around 2 per cent (475,000 t) in the first eleven months of 2016. Growth mainly due to an increase in Chinese apparent demand as world usage excluding China remained essentially unchanged. Chinese apparent demand (excluding changes in unreported stocks) increased by around 3. 5 per cent based mainly on 6 per cent growth in refined production as in fact net imports of refined copper declined by 6 per cent. Net refined copper imports have been on a declining trend in 2016 with the monthly average in Jul-Nov 36 per cent below that of the 1st half of the year. Monthly average Chinese apparent demand in Jul-Nov 2016 is 7 per cent below that in the first half of the year. Usage in the United States and Japan, the second and third leading refined copper using countries, is down by 2 per cent and 3 per cent respectively. On a regional basis, usage is estimated to have increased by 3.5 per cent in Asia (when excluding China, Asia usage increased by 3 per cent) and by 2 per cent in Europe (by 1.5 per cent in the EU), while declining by 3 per cent in the Americas.

Copper supply set to under-perform demand for much of the next half decade. As the global economy departs from several years of stagnation, so too does the outlook for copper pricing. The combination of stronger than expected Chinese demand, a clear lack of visible copper inventory build, an end to cost deflation, and the U.S.-centric reflation story after the Trump election victory sparked positive price momentum through the latter stages of 2016. On the demand side, there's now little to worry about, since the dramatic crunch in capital expenditure cuts since an extended broad-based commodities slump hit the market in the summer of 2014. In 2016, China's real copper consumption likely rose by 5.7 per cent and for the last phase of the current decade is projected to be in the range of 3 to 7 per cent. 

Long term investment sentiment still remains intact as the reports of supply disruptions and improving global economic scenarios.

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