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Monday, 23 December 2013

Copper Prices Dwindling with Profound Weakness amidst Global Uncertainties

Domestic Scenario
India is among the top 20 major producers of copper globally. Over 30 per cent of India’s copper demand comes from the telecom sector and 26 per cent from the electrical sector in India. In addition, the building and construction, engineering, transport and consumer durables sectors are major consumers of copper in India. These sectors stand to benefit the most from lower prices of copper. During the last few years, India’s switch from net importer to exporter is due to a rise in production by three companies: Sterlite Industries, Hindalco, and Hindustan Copper. Hindalco and Sterlite industries account for more than 80% of India’s total copper production. The Indian industry imports raw copper from Chile, Indonesia, Australia, and Canada and exports finished products to various destinations. 

International Scenario
Mine production rose 715,000 MT or 4.5 per cent to 16.023 million MT in 2012 from the previous year, according to the ICSG. There were increases in China (26 per cent) DRC (21 per cent), Mexico (18 per cent), Peru (five per cent) and Chile (three per cent), which more than offset declining output in Indonesia (26 per cent) and Australia (four per cent). The average world mine capacity utilisation rate climbed to 82 per cent in 2012 from 80.6 per cent in 2011. Refined output increased 485,000 MT or 2.5 percent to 20.132 million MT in 2012 compared with 2011, with primary output up 2.3 percent and secondary output up 3.3 per cent. The main increases came from China (11 per cent) via new capacity; Japan (14 per cent), where the industry recovered from the 2011 earthquake and tsunami, and the DRC (28 per cent), where new capacity was brought on line. Output declined six percent in Chile, three percent in the US and 45 per cent in the Philippines after a fire at the country’s sole smelter. Capacity utilisation dropped to 79 per cent from 80.6 per cent in 2011.

Price Trend Analysis
In late 2012 and early 2013, optimism was running high that the US economic recovery would continue and that China would move into recovery mode too. On the strength of that, metal prices ran higher while investment interest picked up. Although US data has tended to remain upbeat, Chinese data has been less constructive and a recovery in demand during the first quarter has proved to be fairly elusive. This forced a reappraisal of the outlook for commodity demand and a corresponding correction in prices. The market was in a deficit of 3,40,000 MT in 2012, according to preliminary data from the International Copper Study Group (ICSG), but it had swung into a surplus in October and remained in one for the whole of the fourth quarter – totaling 2,37,000 MT.
How 2013 turns out is likely to be determined by the extent to which consumers feel the need to restock. Manufacturing PMIs have become quite mixed – the US ISM number climbed to 54.2 in February from 53.1 in January and 50.7 in December but then dropped to 51.3 in March, which suggest the US recovery is still stop/start. Copper has had some of the tightest fundamentals of all the metals in recent years, which is no doubt why prices have managed to hold so far above the marginal cost of production. On paper, the market looks set to move into a supply surplus in 2013, which should in theory put downward pressure on prices; indeed, that seems to have been unfolding in recent months.
Estimates & Price Forecast
China runs a structural copper deficit, with refined consumption of around 8.8 million MT and refined production of around 5.6 million MT; it seems unlikely that much of the Chinese stockpile will leave the country. Asia is accounting for 87 per cent of the increase in capacity – the China, India, Indonesia and Iran totals will all increase. Refined capacity would reach 30 million MT per year by the end of 2016, a rise of 18 per cent from 2012. The price of copper is likely to remain in tight range for the year 2014 with predominant weakness. Any rise in the price would be a level to sell fresh in futures. The range of the Indian MCX would be INR 484 on the higher side with possibility of its tumbling to INR 340 & below in 2014.

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