Copper prices follow the natural flow of industrial demand, responding to long-term growth and contraction cycles, as well as fluctuations in mining production. World financial markets understand its power to predict economic turning points. Copper affects nearly every aspect of industrial production as an integral component in building construction, power generation and transmission, electronic products, industrial machinery and transportation. The supply continues to be robust and on the positive side since it entered on the surplus side mid of 2015.
Rapid growth in BRIC nations in the last decade underpinned copper prices, with China leading the way, building new cities in the middle of agricultural land while engaging in massive renovation projects throughout older cities. The country’s annual GDP growth rate hit a peak at 14 per cent in 2007, dropped to 9.2 per cent in 2009 and rose to 10.4 per cent in 2010. By the end of 2010, analysts were convinced that China and BRIC nations’ rapid growth would continue for another decade. However, that year marked a cyclical peak, with growth falling at a steady pace into the second half of 2015 when it hit 6.9 per cent. Copper took notice of this sea change early, printing the 2011 high and turning sharply lower in a new downtrend that’s still in progress. It crossed the last support level above the 2008 bear market low in the fourth quarter of 2015, setting up a major test.
Rising copper prices reflect increasing economic growth, with countries building infrastructure at a rapid pace to meet the demand for new factories, commercial facilities, and residences. Falling copper prices signal slowing economic growth or recessionary conditions, with commercial and industrial occupancy levels falling because supply exceeds demand. Since China utilizes over 45 per cent of the total copper production, the state of its economy is the guiding force for the copper. Over the last one and half year, the slowdown in the Chinese GDP growth, weakness in its PMI Data and weak demand for copper has led to the massive fall in prices (breaking the lower levels of 8 -9 years in different regions). This has also severely affected the economies of the copper mining countries and led to significant production cuts by major mines. Since the start of 2016 the prices have shown some stability on presumption of global economic stability.
In the current scenario, China’s growth is expected to stabilize in 2016 at the same time the United States continues its slow but steady economic expansion. The introduction of Federal Reserve rate hikes could jeopardize U.S. growth, but prior history suggests it will be several years before the economy turns into the next recessionary cycle. Europe becomes the wild card in this scenario, with dovish central bank policies attempting to jumpstart Eurozone economies. Their efforts may be working, with growth hitting a four-year high in the fourth quarter of 2015. China has accumulated most of the world’s copper stocks, with miners and investors trying to figure out what that means for future demand. China, which consumes more than 40 per cent of global copper, now accounts for almost 80 per cent of stockpiles after booming imports late last year sucked up stocks held elsewhere. The bears are currently having a tighter grip on the copper market and opine that the stockpile reflects the demand weakness as China transitions to a consumer-driven economy. The others are of the opinion that the stockpile is not necessarily a bad thing, and shows the Chinese state is buying and holding copper for strategic reasons.
Copper lost a quarter of its value last year as slowing demand in the Asian nation exacerbated a glut after years of over-investment by miners. While copper has rebounded from January’s six-year low, it’s more than 50 percent lower than at the height of the commodities boom in February 2011. Demand in China needs a marked pickup in the next few months to support prices. While copper held in warehouses monitored by the Shanghai Futures Exchange fell in the past two weeks, it has more than doubled this year to a record high last month. Metal held in China’s bonded warehouses, which isn’t monitored and is custom-free, has expanded to a seven-month high amid oversupply, according data compiled by Bloomberg Intelligence.
Apart for the recent economic development the supply dynamics needs to be studied in details. As per the study, World mine production is estimated to have increased by around 2 per cent (30,000 MT) in January 2016 compared with production in January 2015. Concentrate production increased by 2.5 per cent while solvent extraction-electrowinning (SX-EW) remained essentially unchanged. The increase in world mine production was mainly due to a recovery in production levels in Indonesia and in Peru while the latter also benefited from new production at mines that started last year. Production declined by 11 per cent in Chile, the world biggest copper mine producer. World refined production is estimated to have increased by around 7 per cent (130,000 MT) in January 2016 compared with refined production in the same month of 2015: primary production was up by 7 per cent and secondary production (from scrap) was up by 6 per cent. The main contributor to growth was China (+14 per cent), followed by the United States where production increased by 30 per cent. Output in Chile, the second leading refined copper producer, increased by 4.5 per cent. On a regional basis, refined output in January is estimated to have increased in the Americas (10 per cent), Asia (10 per cent) and Oceania (20 per cent) while declining in Africa (-12 per cent) and remaining unchanged in Europe. The average world refinery capacity utilization rate for January 2016 increased to 85 per cent from 81 per cent in January 2015.
The refined copper market balance for January 2016 showed an apparent production surplus of 56,000 MT. When making seasonal adjustments for world refined production and usage, January showed a production surplus of 50,000 MT. This compares with a production surplus of 15,000 MT (a seasonally adjusted surplus of 9,000 MT) in January 2015.
One point needed to be highlighted that the Chinese has been benefiting from the slump in the global copper prices. The country is the largest copper importer. So, lower copper prices bode well for China. However, lower copper prices would also mean that China mines less copper domestically and relies more on imports—both refined and concentrates. China lacks secondary copper reserves. It would make sense for the country to import more copper instead of producing it domestically when copper prices are trading at multiyear lows. This would mean that Chinese copper imports might not fall much despite the demand slowdown in the country. Another issue that could hit copper prices in the medium term is the copper stacked in financing deals. A lot of metal is tied in these deals. It could return to the physical market if we see rate hikes by the Fed. The successive rate cuts by the Chinese Central Bank already reduced the arbitrage opportunities in these transactions.
Thus, all is not so negative with the investment sentiments in the copper industry. Slight stability in the global economy would bring back the prices on track. New investors in the copper industry should now be keenly watching the movement in the FED Interest Rates and the Chinese industrial growth index for further direction and for those who have already invested should stay invested and have patience as the low phase of the industry is supposed to be over.