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Friday, 12 June 2015

Surplus Supplies & Shrinking Demand Taking Its Toll

Copper prices, seen as a barometer of industrial demand around the world, has plunged to its new lows in recent times as fears grew large over the health of the global economy. Copper has been the under performer in the base metals complex since the beginning of 2014 and affected by the supply balances from deficits to surpluses. Investors were panicked into selling after the World Bank raised fresh concerns about the health of the global economy, cutting its growth forecasts for this year and next and warning that the Eurozone Economy could be facing permanent stagnation. Copper is now in the midst of its longest run of losses for the year, and is dragging other commodities as aluminum, lead, zinc, nickel and iron ore on the lower side.
The question of surplus – whether there will be one – in the copper market is very much up in the air this year. Both Reuters’ GFMS and the International Copper Study Group (ICSG) see a surplus around 400,000 tonnes in the making for 2015, but key factor driving this alternate view of a tighter copper market – one close to balance – is that operational disruptions have already affected supply substantially in 2015. Above all estimates, Glencore went far enough to predict a 1.6 million MT, deficit in 2015.
On the production side, as per ICSG, World mine production estimated to have increased by around 2 per cent (65,000 MT) in the first two months of 2015 compared with production in the same period of 2014. Concentrate production increased by 2 per cent while solvent extraction-electrowinning (SX-EW) increased by 4 per cent. The increase in world mine production was mainly due to recovery in production in Indonesia and Chile, although the latter also benefited from production at mines that started last year. Production in Peru and the United States declined by 6 per cent and 3 per cent respectively.
World refined production estimated to have increased by around 5 per cent (170,000 MT) in the first two months of 2015 compared with refined production in the same period of 2014: primary production was up by 3 per cent and secondary production (from scrap) was up by 13 per cent. The main contributor to growth was China (9 per cent), followed by the Philippines, Indonesia and the DRC where aggregated production has increased by 48 per cent (67,000 MT). Output in Chile, the second leading refined copper producer, declined by 2 per cent, and in the United States production declined by 7 per cent.
In the first two months of 2015, world apparent usage estimated to have declined by around 3.5 per cent (130,000 MT) compared with that in the same period of 2014. Chinese apparent demand declined by 5 per cent (90,000 MT) based on a 26 per cent decrease in net imports of refined copper from the high net import level in early 2014 and consequently higher apparent usage. Excluding China, world usage declined by around 2 per cent mainly due to a decline of 42 per cent in Russia’s apparent usage (following the withdrawal of Russia’s cathode export tax in September 2014) and a decline of 7 per cent in EU usage.
China’s bonded stocks remained unchanged in the first two months of 2015 from the yearend 2014 level. Stocks increased by around 120,000 MT in the same period of 2014. In the first two months of 2015, the world refined copper balance adjusted for the change in Chinese bonded stocks indicates a production surplus of around 153,000 MT compared with a deficit of around 28,000 MT in the same period of 2014.
Manufacturing activity showed few signs of picking up across Europe, Asia or the Americas last month as demand stayed stubbornly weak, highlighting the need for central banks to continue supporting economic growth. Copper prices could draw further support if mining conflicts in Peru, a top global minerals exporter, heat up ahead of presidential and congressional elections next year as political outsiders whip up anti-mining sentiment. But, given the absence of major supply disruptions in May, Barclays sees a surplus of 48,000 MT for 2015.
China continues to be crucial to the whole picture, accounting for about 45 per cent of global demand for copper as the metal’s wide range of uses for wiring, piping and in general industry make it essential to an economy where infrastructure is expanding. Although China is still growing fast compared with advanced nations such as Britain and US, growth is nevertheless slowing and fears of a hard landing remain. Growth last year expected to have been less than 7.5 per cent, missing Beijing’s target for the first time since 1998.
The current demand scenario for Chinese demand is showing signs of improvement, as there are strong orders for copper in China by cable makers and for power grid investment. China’s copper demand to grow by 4 per cent this year on considerable use in power grid investment, based on announced government spending plans. The seasonally strongest quarter for copper demand in China is passing its peak with factories eyeing a summer production slowdown, leading to expectations for lower metal consumption. One of the hurdles facing industrial companies in China is a dearth of credit, with banks, burnt by last year's commodity financing scandal, reconsidering their businesses. The continued weakness in Chinese data, combined with the strong dollar rally of the last six months, have together hurt copper. This has created buying opportunities for copper, which also has the best long-term fundamentals in the industrial metals space, given grade declines, delayed new mines, and advantage to the growing electrification of the emerging world.
The other supportive factor for the price is the speculation that the Federal Reserve is likely to wait longer to raise interest rates amid mixed economic data. The dollar also headed for the biggest drop in 10 weeks against a basket of 10 currencies, boosting the appeal of commodities as an investment. Also weighing on oil, copper and other commodity prices is a strong dollar. When the dollar is strong, the price of dollar-denominated commodities such as oil and copper tend to fall, because they are globally traded and are more expensive for holders of foreign currencies. In the wider markets, a persistent sell-off in bond markets left financial market confidence in short supply, with stocks lower globally; while oil prices slipped ahead of Friday's OPEC meeting, prolonging the weakness in the copper market. Overall, we can say that the current drop in the copper prices is mainly due to investor’s panic rather than a sudden deterioration in fundamentals and can change in a very short span.  
The Indian copper market is also experiencing the pressure of the global uncertainty as the major copper scrap commodities prices showed a negative trend on Scrap Register Price Index. India's major copper scrap commodities like copper mixed scrap, copper pat, copper super d. rod, copper utensil scrap and copper wire scrap are all pointing southward. In spite of the weak short-term fundamentals, the copper market is likely to maintain its long-term bullishness as the automobile, power and infrastructure sector in India, which is poised to grow exponentially and I feel that this is one of the strong factors to motivate the investors to invest in copper with long-term horizon.

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