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Monday, 26 May 2014

Copper Investment Dynamics – Best Yet to Come

Copper is one of the most widely-used industrial metals, its malleability and conduction ability combined with its ability to withstand corrosion makes it highly sought out for use in wiring, plumbing and telecommunication equipment. Our modern lives require an enormous amount of copper. The major applications of copper are in electrical wires (60 per cent), roofing and plumbing (20 per cent) and industrial machinery (15 per cent). Copper compounds in liquid form are used as a wood preservative, particularly in treating original portion of structures during restoration of damage due to dry rot. Textile fibers use copper to create antimicrobial protective fabrics Electroplating commonly uses copper as a base for other metals such as nickel Copper is used as the printing plate in etching, engraving and other forms of intaglio (printmaking) printmaking Copper oxide and carbonate is used in glass-making and in ceramic glazes to impart green and brown colors. Copper is the principal alloying metal in some sterling silver and gold alloys Copper is used as a constituent of brass, bronze, gilding metal and many other base metal alloys.

Supply Strength of Copper Market

South America will remain the region with the largest copper mine installed capacity and is expected to bring to the market until 2016 an additional 2.3 Mt capacity (31 per cent of the world total growth). Asian and African copper mining capacity has also increasing substantially. All together, these three regions represent 78 per cent of the world additional copper mine production capacity to come on stream by 2016. Until 2016, world copper refinery capacity expected to grow by 4.6 Mt (18 per cent) to 30 Mt. 3.6 Mt of the expansion expected to come from electrolytic refineries and almost 1 Mt from electrowinning capacity. Supremacy of Asia is likely to continue over the other regions in refining capacity with small improvements in Africa and North America. As per the Projected World Copper Refined Capacity Increase by Country, China is likely to be the biggest contributor to the growth with a strong increase of around 2.1 Mt representing 47 per cent of the world growth for the period 2012-16.

Price Drivers for the Market

London Metal Exchange's global network holds the least copper available for delivery since 2008. In May 2008, copper peaked at a price of over $4.21 per pound. Copper is an excellent bell weather commodity when it comes to global economic growth and particularly Chinese growth potential. China's economy is expected to grow at 7.5 per cent this year as economic expansion in the US speeds up to 2.6 per cent. The euro zone is returning to growth after two years of contraction.

Premiums over LME benchmark prices for physical copper were the highest in more than seven years in Europe in November and tripled in the past year in China. Therefore, only a considerable slowdown in China would tarnish the outlook for the price of copper at this point, in my opinion. Copper has been trading in a range of $3.00 to $3.40 since last April. The technical picture for copper is fairly neutral at the moment; therefore, it is the fundamentals of the copper market that will push it through support or resistance.

One other event that can get the industrial metals and copper really moving higher is a new policy in Indonesia that takes effect this month. Indonesia is banning the export of many mineral ores. This has already caused the price of nickel to vault higher in recent trading sessions. Indonesia produces 18-20 per cent of the world's supply of mined nickel ore, and is a significant copper producer. The Grasberg mining complex in Indonesia, the world's largest copper and gold mine in terms of recoverable reserves, is owned and operated by Freeport McMoRan (FCX). It is not 100 per cent clear whether the Indonesian ban will affect copper concentrate deliveries from Grasberg given the political wrangling going on in Jakarta right now. Fundamentals are strongly pointing to put copper on the radar following the supply crunch in the Southeast Asian region.

In January 2014, world usage is estimated to have increased by around 11 per cent compared with that in January 2013. Chinese apparent demand increased by 28 per cent based on a 70 per cent increase in net imports of refined copper from the low net import level in January 2013 and subsequent lower apparent usage. Excluding China, world usage declined by around 1 per cent. On a regional basis, usage is estimated to have declined by 1 per cent in the Americas and Europe, respectively and to have increased by 15 per cent in Africa and 19 per cent in Asia (by only 1 per cent when excluding China).

Constraints for Industry

Amidst the projections of skyrocketing demand for copper, the concerns over long term supply is also supporting the bullish trend. 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 Inadequate exploration funding.

Recent developments supporting the bulls

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. Copper demand in China has at least 80 per cent growth left to reach developed world averages and can single handedly support double-digit growth for many years. Beijing has also renewed the 'home appliance subsidy scheme' and is promoting electric cars, which are twice as copper-intensive as conventional vehicles. China has set a goal of 65 per cent urbanization rate by 2050. Over the coming 40 years that means 20 per cent of urban growth per year, that translates into 300 million rural residents becoming urban residents over this time period.

According to the International Energy Agency, India's power production needs to rise by 15-20 per cent annually and to meet that, India needs to invest $1.25 trillion by 2030 into energy infrastructure. From this new infrastructure, India's annual copper demand is expected to more than double. 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. The IMF has raised its forecast for global growth to 3.6 per cent in 2014 compared to 2.9 per cent growth in 2013.

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