Copper one of the earliest discovered metals is priced for its utility in almost all spheres. However, as the known resources are limited, the metals unique quality enables recycling thereby further increasing its utility. Recycled copper (also known as secondary copper) cannot be distinguished from primary copper (copper originating from ores), once reprocessed. Recycling copper extends the efficiency of use of the metal, resulting in saving of energy and contributes to ensuring that we have a sustainable source of the metal for future generations.
The global copper industry is presently under stress due to the increasing fears of a global economic slowdown and shrinking demand across sectors. As per recent demand and supply estimates, China has become the focus /center stage for all major triggers in the prices. 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. For the ease of understanding the complete picture, it is important to understand the supply, demand and global economic scenario.
Recent Development Supporting Increased & Sustained Supply of Copper
According to the International Copper Study Group (ICSG), the global mine production is expected to rise by three per cent in the current calendar year and a further by 6.7 per cent in 2015. This is owing to additional output due to capacity expansion of the existing mines and the new mining projects. Resolution of issues and subsequent resumption of export shipments from the existing mines are also expected to result in an increase in supply of copper. Indonesia had imposed an export tax on US-based miners, Newmont and Freeport McMoRan’s mining operations in Indonesia in January 2014. However the mines have resumed production in August 2014. Recently, Newmont Mining also exported 30 thousand tonnes of copper concentrate from Indonesia, ending a nine-month hiatus during the year. Apart from the above two copper majors, KGHM began production at its Sierra Gorda mine in Chile, with an aim to produce 120 thousand tonnes of copper a year from 2015. The company will further increase production to 220 thousand tonnes, after completing the second phase. These factors are expected to drive the supply of copper concentrates into surplus. Seeing the increased global supply of copper concentrates, production of refined copper is expected to rise by 10.1 per cent in 2014-15, after falling by six per cent in 2013-14.
On the domestic front recovery in cathode production by Sesa Sterlite coupled with increased supply of copper concentrates, globally is likely to lead to an increase in production.
Changes in Demand Scenario
China accounts for 46 per cent of world consumption of refined copper which is gradually increasing. By 2017, its share should be up to 47 per cent because it controls the high level of manufacturing capability and capacity requirements. In Europe, disappointing economic growth has somewhat reversed in the second quarter. The United States is picking up steam with traction in industrial activity; however, because of the economic shift that occurred over the past decade, the real demand driver remains China. In case of India, the growth in imports is expected to moderate to 10 per cent in 2014-15. This will be on account of improved supply of copper in the domestic market. Exports are likely to grow by 15 per cent after falling by 2.7 per cent in the previous year. Sesa Sterlite exports 35-40 per cent of its total copper production and caters mainly to China and South East Asia. The company had produced lower cathodes in the previous year and is currently operating at its rated capacity. This will lead to an increase in the country’s overall exports, but since the global prices are being weighed down by increased supply. Thus pressure on copper prices globally is likely to put downward pressure on the cathode prices in the domestic market, and fall in cathode price in the export market cannot be ruled out for the year 2014-15. Apart from India & China, the US has seen demand recovery, but its small market share (9% of global demand) cannot offset market concerns arising over the recession in Europe (19% of global demand). Looking ahead, concerns over the recession and the deflationary pressure in Europe will continue to weigh on the global economic outlook even though the US economy is on track to recover with improving job data, housing starts and auto sales. The global demand (ex-China) will continue to be a drag on overall global copper demand and will not be strong enough to offset the slowdown in China’s demand.
Recent Developments Affecting Copper Prices
On the supply side, the Chile’s state-run miner produced 1.23 million tonnes of copper in January to September of the current year- a 4 per cent rise from a year ago. However, pre-tax profit fell 14 per cent to USD 2.3 billion which Codelco said was largely due to a slide in the price of copper, down around 14 per cent year to date. Codelco is battling falling ore grades at its decades old flagship mines and is seeking to implement an ambitious USD 27 billion multi-year investment plan to open new projects and revamp older ones. On the labour front, there haven’t been any major labour disruptions recently. All the global mines are producing copper in ample amount.
The most recent US crude fall of more than USD 20 to a five-year low in Asian trade with Brent futures touching a fresh four-year low, extending a steep sell-off after OPEC decided not to cut production last week leading to profound weakness in other commodity markets.
In China, the world’s largest consumer of energy, metals and grains, the manufacturing gauge fell to an eight-month low in November 2014. U.S. holiday spending slowed this past week, German manufacturing unexpectedly shrank last month, and Moody’s Investors Service cut Japan’s credit rating. Japan is the second major consumer of copper after China. Capital expenditures for copper producers tracked by Bloomberg Intelligence are set to decline 21 percent this year from 2013, and fall a further 10 percent in 2015.
The Way Forward
Overall, market sentiment on the economic outlook for China and global GDP growth are both very important in determining prices. The strength or weakness of the U.S. dollar is also important. One major point of concern for the copper market is that, we expect a strengthening of the U.S. dollar in the next 18 months – not usually a positive for dollar-denominated commodity prices. The trends in global refined copper consumption are also progressing to an alarming state, which is likely to support the copper industry. Going by the demand forecast from the Chinese Housing & Development Sector, Industrial production is not likely keeping up with copper consumption and recent indications have pointed to estimates in Chinese consumption to be very conservative. It now appears that in the next 25 years, the world will need to produce as much copper as has been produced in the history of humanity. Thus, the long-term investment in copper industry is still a prudent decision.