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Thursday, 18 February 2016

Red Metal Continues to Feel Pressure of Uncertain Demand

The Copper market has recently been pressured by the lack of confirmed demand and rudderless wandering global economy. The US dollar has been the main guiding factor for copper market as the supply and demand factors have remained almost stable. Thus, if the U.S. Dollar continues to trend higher, and if expectations for economic growth in China and elsewhere remain gloomy, the decline in copper is likely to continue as per the current trend. Though the markets have shown slight improvement in the sentiment, the gains in recent weeks have come amid financial market turmoil and weak economic signals, and a more likely driver of the increase has been a weakening U.S. dollar. Copper trade which is denominated in dollars, gets cheaper as the U.S. currency weakens, driving stronger investment flows and commercial demand. Some of the market's gains in recent days can also be attributed to the traders closing out short positions that profit from falling prices as the market has rallied against them. A small support also came from the Chinese as the head of China's top economic planning agency opined that the country's economic growth target in 2016 is likely to be in a range of 6.5 per cent to 7 per cent. It’s important to note that 45 per cent of world’s copper demand comes from China. China’s weak economic health led to a 25.3 per cent fall in copper prices in the LME in 2015. There are the same demand concerns in 2016. In the LME, copper already fell by 6.7 per cent since the beginning of 2016.

When we analyze the demand and supply scenario we can see the balance on the surplus side. ICSG projections for 2015 indicate that the market should essentially remain balanced, while in 2016 ICSG forecasts a small deficit of around 130,000 MT as demand growth outpaces production growth. This compares with a surplus of 360,000 MT and 230,000 MT for 2015 and 2016, respectively, forecast at our April 2015 meeting. The revisions reflect substantial changes in market conditions since April 2015. Although a downward revision has been made to global usage in view of lower than anticipated growth in China, larger downward adjustments have been made to production as a result of recent announcements of production cuts. World mine production after adjusting for historical disruption factors is expected to increase by around 1.2 per cent in 2015 (a similar growth to 2014) to reach 18.8 MT. Despite announced production cuts, higher growth of around 4 per cent is expected in 2016 as additional supply is expected to arise from expansions at existing operations, ramp-up in production from mines that have recently come on stream and output from a few new mine projects. World mine production is estimated to have increased by around 3.5 per cent (520,000 MT) in the first ten months of 2015 compared with production in the same period of 2014. Concentrate production increased by 4 per cent while solvent extraction-electro-winning (SX-EW) increased by 1 per cent. The increase in world mine production was mainly due to a recovery in production levels at operating mines in Indonesia (61 per cent growth in Indonesian mine production as in 2014 output was constrained by a seven month ban on concentrates exports) and an 18 per cent increase in Peruvian output (benefitting from higher production rates at operating mines and a ramp-up in production from mines that started in 2014-2015). Production increased by 0.7 per cent in Chile while remaining essentially unchanged in the United States and China. World refined production is estimated to have increased by about 1.8 per cent (330,000 MT) in the first ten months of 2015 compared with refined production in the same period of 2014: primary production was up by 2 per cent and secondary production (from scrap) remained essentially unchanged. The main contributor to growth in world refined production was China (up by 4 per cent) followed by the DRC and India where production increased by 5 per cent, respectively. Output in Chile and Japan (the second and third leading refined copper producers) declined by 2 per cent and 3 per cent, respectively, while in the United States (the fourth largest refined copper producer), production dropped by 2 per cent.

In the first ten months of 2015, world apparent usage is estimated to have declined by around 1 per cent (210,000 MT) compared with that in the same period of 2014. Excluding China, world usage declined by around 3.5 per cent. Although Chinese apparent demand increased by around 1.5 per cent, usage declined by 4.5 per cent and 7 per cent in the EU and Japan, respectively, and by 46 per cent in Russia (following the withdrawal of Russia’s cathode export tax in September 2014).

In a move to support the copper market, the Chinese authorities have planned to reduce the minimum down payment required for first and second-time home buyers in most cities. This move would enhance the copper demand as China’s construction sector accounts for 25 per cent of copper demand, and China is the world’s largest consumer of copper. According to the data released by the General Administration of Customs, China imported 530,000 MT of unwrought copper and copper products in December 2015. The imports rose by 26 per cent compared to December 2014. It’s the second-highest monthly imports for unwrought copper and copper products by China.

As for the coming events the three important things which could govern the copper prices are China’s January trade data, which is set to be released on February 15, Freeport’s ongoing discussions with the Indonesian government and possible Russia-OPEC (Organization of Petroleum Exporting Countries) discussions on cutting crude production. The January trade data will be crucial for Freeport investors in two ways. First, China’s overall exports and imports will provide insight into the state of the world’s second-largest economy. Second, China’s copper imports will tell us whether copper demand is indeed strong or whether the spike in December copper imports was more of a one-time blip. Better-than-expected Chinese copper imports might have a positive impact on copper prices. However, if China’s copper imports dip significantly from last month’s level, it could spoil market sentiments. Freeport-McMoRan (FCX) owns the Grasberg mine in Indonesia (EIDO), and Rio Tinto (RIO) is Freeport’s partner in this mine. Rio Tinto also owns the Oyo Tolgoi mine in Mongolia through its subsidiary Turquoise Hill Resources (TRQ). Freeport’s export license in Indonesia is currently suspended, as the company failed to reach a deal with the Indonesian government to extend the export license. The resumption of license is likely to increase the inflow of copper in the global market. There have been reports that OPEC and Russia are planning to reduce crude oil output in a coordinated way and if the deal is through it would bring down the cost of copper mining for Freeport significantly.

Thus, we can see from the above discussion that since the copper demand and supply scenario is gripped by uncertainties, there are a lot of ifs and buts encircling the copper trade and finding smooth passage through this turmoil would need significant and sustained boost of demand from the Chinese and global partners.

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