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Tuesday, 7 January 2014

Copper : A Base Metal for Assured Investment in 2014

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 per cent 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) Democratic Republic of Congo (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.

Stocks & 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.

The trends in global refined copper consumption are also progressing to an alarming state. Industrial production is not 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.


The outlook for copper is greatly focused on China. Copper consumption will grow as a consequence of overall economic growth. China has been a shining example of overall economic growth, growing at an annual rate of 9.9% between 1980 and 2010. Most forecasts do not have China slowing down anytime soon; the IMF predicts China's economy will expand at an annual rate of 9.7% over the next 5 years. One of the largest drivers of copper will be the growth of the Chinese consumer. Now one billion Chinese have become consumers, salaries have increased, and domestic consumption will continue growing faster than GDP (which in itself is projected to grow 500% by 2025).

China's consumption of refined copper is expected to grow more quickly in 2014, though not fast enough to boost imports significantly as production increases more quickly. China is the world's top producer and consumer of the metal and imports have been dropping in line with weaker economic activity, dragging international prices down nearly 10 per cent so far this year in the international market. China's consumption of refined copper is forecast to grow 6.5 per cent to 8.7 million tonnes in 2014, as Beijing continues to invest heavily in the power sector. The rate is slightly up from the 6.4 per cent growth rate expected for 2013 and 4.8 per cent increase recorded in 2012.

Other supporting news coming from US, where The Fed trimmed the pace of its monthly asset purchases by $10 billion to $75 billion, and sought to tamper the long-awaited move by suggesting its key interest rate would stay at rock bottom even longer than previously promised. Prices managed to gain around 3 percent by the end of the year as U.S. GDP grew at a solid 4.1 per cent annual rate from July through September, the fastest pace since late 2011 and significantly higher than previously believed, boosting the market sentiments.

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 with all increase. Refined capacity would reach 30 million MT per year by the end of 2016, a rise of 18 per cent from 2012. In spite of projection o sharp hike in the production capacity, the huge demand from the Chinese power sector and emerging demand from European Union is likely to drive the prices on the higher side. Currently, Copper was one of the best performing commodities in December as it reacted to rising growth prospects in the US and sustained growth prospects in China, the world's two largest consumers. Supporting the move has been the continued drop in inventories at warehouses monitored by the two major futures exchanges in London and Shanghai. The range of the Indian MCX would be INR 380 on the lower side with possibility of its surging to INR 540 & above in 2014.

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