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Thursday, 6 March 2014

Copper: A Prudent Addition to Your Investment Portfolio

Copper is increasing in popularity as an investable asset for those looking for a way to gain exposure to the unprecedented growth currently underway in the emerging markets. As per the recent demand and supply scenario China has become the center stage for all major triggers in the prices. China is the top consumer of copper in the world. Another reason is the current fundamental in what is driving copper growth demand, a trend that extends beyond China and into the emerging markets. Apart from China, there are three major regions that copper investors should focus on in terms of assessing copper demand: the BRIC countries, the U.S. and The Euro Zone. A savvy copper investor needs to follow the economic developments in those regions for clues into what the future demand for copper looks like in these regions.

Trends in Consumption Demand

Copper consumption estimates for China are being revised up. Huge spending on copper-intensive power infrastructure on the state grid in 'rural areas' will continue through 2014 (12 bn RMB). Beijing has also renewed the 'home appliance subsidy scheme' and is promoting electric cars, which are twice as copper-intensive as conventional vehicles. Overall urban population increases (by 2025, one billion people are projected to live in urban areas) and 221 Chinese cities will have over 1 million people (Europe has 35 cities with over 1 million people). Along with those massive increases, increased demand will be seen for buildings (5 million projected to be constructed by 2025) and transit (170 mass transit systems projected to be built- Europe has 70). Ultimately, whether it is more people, more buildings, or more infrastructures, more copper will be needed to facilitate construction.

ICSG expects world apparent refined demand in 2013 to remain unchanged from that in 2012 (20.5 million tonnes). Although real demand for copper in China is expected to increase by about 6 per cent in 2013, apparent demand in China (that is uncorrected for unreported stock changes) is expected to decrease in 2013 as a result of much lower refined imports. Usage in the rest of the world is expected to increase by around 1 per cent. With better prospects for the world economy in 2014, world usage is expected to grow by around 4.5 per cent in 2014 with world ex-China expected to grow by 2.5 per cent.

Relevance of Chinese Demand

As per a recent study, The State Grid Corporation of China (SGCC), which provides power to 80 per cent of the world’s second-largest economy aims to boost by 13 per cent its annual investment to more than $60 billion. Given that Chinese utilities account for more than 40 per cent of Chinese copper demand, that sort of big jump in capital investment should firm up prices.

Global Supply Update

In developing its global market balance, International Copper Study Group (ICSG) uses an apparent demand calculation for China, the leading global consumer of copper, accounting for about 40 per cent of world demand. Apparent copper demand for China is based only on reported data (production + net trade +/- SHFE stock changes) and does not take into account changes in unreported stocks [State Reserve Bureau (SRB), producer, consumer and merchant/trader], which may be significant during periods of stocking or de-stocking and which could significantly alter supply-demand balances. ICSG projections for 2013 indicate that world production of refined copper is expected to exceed demand for refined copper by about 390,000 tonnes, as demand will lag behind the growth in production. For 2014, although a recovery in usage is anticipated, a higher surplus is expected with increased output from new and existing mines. After three years of relatively stagnant production, mine production in 2013 is expected to increase by 6.5 per cent from that in 2012. Strong growth is expected to continue in 2014 and 2015 as mine projects that were deferred or delayed during the financial crisis are expected to start coming on stream. Expansions and project startups during 2013 and 2014 are expected to increase world mine production to around 18.6 million tonnes in 2014 from 16.7 million tonnes in 2012. Most of the new production is expected to be copper in concentrate, with only limited electrowinning expansion anticipated.

In 2013, world refined copper production is expected to increase by 3.9 per cent compared with that in 2012 as constrained production from maintenance and temporary operational shutdowns in some regions is overshadowed by expanded output in other regions. In 2014, refined copper production is expected to grow by around 5.5 per cent to 22.1 million tonnes with the restoration of production at existing plants and new and expanded capacity at electrolytic plants in China, and to a lesser extent SX-EW plants in Africa. Primary refined copper production is expected to grow by about 7 per cent and secondary production by 2 per cent. 

Supply Concerns

Amidst the projections of skyrocketing demand for copper, the concerns over long term supply is also supporting the bullish trend. The world is also beginning to feel the impact of supply challenges. When it comes down to the production of copper, the industry is experiencing difficulties from various aspects of the production cycle as: Discoveries of higher grade deposits are becoming less frequent, More underground mines are producing copper, at a smaller output capacity than open pits, Greater country risks and Infrastructure Challenges (remote locations), Declining average grades and Inadequate exploration funding.

Stock Update

In addition to higher demand and production constraints, the global stocks of already-mined copper are tightening. A year ago copper stocks were about 1.46 million tonnes. That rose to 1.81 million tonnes in April of last year and has been falling ever since. On December 13th 2013, global copper stocks had declined to an estimated 1.27 million tonnes. Further, the metal’s on-warrant inventory has shrunk to its lowest level since 2008.

Price Forecast

The price trend in copper was mixed in 2013, struggling a bit on concerns of demand growth, and how it responded was therefore a reflection of its supply situation. With forecasts for improving economic growth in 2014, copper is prepared to rally, with its ability to climb based on its own supply situation.

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