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Wednesday, 7 September 2016

Investor’s Sentiment in Doldrums Amidst Absence of Significant Stimulus

Copper trade is still lacking support from the major industry players amidst pressure form the abundance of supplies and global economic slowdown. In spite of the few scattered efforts to add strength to the economic growth in the major consuming countries, the market lacks the sustained support which is required to push up the copper prices and maintain it on the higher levels. Copper tumbled in the past three years as China, the biggest consumer, headed for its slowest economic growth in a generation following years of investment in output by miners. Demand for copper continues to the main concern as there are already signs of China’s wavering demand. The country’s imports of refined copper shrank in July to the smallest in 17 months, while exports jumped fivefold from a year earlier. 

On the supply side the surplus in no more a surprise for the industry. World mine production is estimated to have increased by around 4 per cent (345,000 MT) in the first five months of 2016 compared with production in the same period of 2015. Concentrate production increased by 5.5 per cent while solvent extraction-electro-winning (SX-EW) remained essentially unchanged. The increase in world mine production was mainly due to a 52 per cent rise in Peruvian output that is benefitting from new and expanded capacity brought on stream in the last two years. A recovery in production levels in Canada and the United States, expanded capacity in Mexico and a ramp-up in production in Mongolia also contributed to world growth. However overall growth was partially offset by a 5 per cent decline in production in Chile, the world’s biggest copper mine producer and 11 per cent decline in DRC where output is constrained by temporary production cuts. The average world mine capacity utilization rate for the first five months of 2016 remains practically unchanged from that in the same period of 2015. World refined production is estimated to have increased by about 3.5 per cent (330,000 MT) in the first five months of 2016 compared with refined production in the same period of 2015, primary production was up by 3 per cent and secondary production (from scrap) was up by 5 per cent. The main contributor to growth was China (+7 per cent), followed by the United States where production increased by 18 per cent. Output in Chile and Japan - the second and third leading refined copper producers - increased by around 3.5 per cent respectively. Refined production in the DRC and Zambia declined due to the impact of temporary production cuts. The average world refinery capacity utilization rate for the first five months of 2016 increased to 83.5 per cent from 82.2 per cent in the same period of 2015.

Though there has been a marginal improvement in the demand, it has significantly failed to keep pace with the rising supplies. In the first five months of 2016, world apparent refined usage is estimated to have increased by around 5 per cent (510,000 MT) compared with that in the same period of 2015 mainly due to strong Chinese apparent demand. Chinese apparent demand increased by around 12 per cent based on a 22 per cent increase in net imports of refined copper from the lower net import level in early 2015 and consequently lower apparent demand. Copper imports by China have been declining since April 2016 after reaching a peak in March. This increase in its export data and a decline in imports raised concerns over the strength of demand for copper in China. Excluding China, world usage remained essentially unchanged. After taking imports of unwrought copper and products to a record in the first half, China cut purchases to 360,000 MT in July, the lowest since August 2015. On a regional basis, usage is estimated to have increased by 6 per cent in Europe and 8 per cent in Asia (when excluding China, Asia usage declined by 2.5 per cent), while declining by 20 per cent and 4 per cent in Africa and in the Americas respectively and remaining essentially unchanged in Oceania.

The industry has been trying to cut the supplies in order to match up with the decline in the demand but copper-output cuts spurred by lower prices aren’t enough to end a surplus this year and demand won’t catch up with supply until 2017. Production outpaced demand by about 147,000 MT in 2015, the biggest surplus since 2009. Till now, around 700,000 MT of supply will have been removed in about the year through mid-2016 as prices sank to a six-year low. Still, new supplies from mines added this year indicated that the glut would not be completely wiped out in 2016. Stockpiles of the metal are ballooning, further pointing to a demand slowdown. Inventories monitored by the London Metal Exchange have jumped to a 10-month high. Supplies are likely moving out of China and into warehouses tracked by the London Metal Exchange. 

Going by the above situation of supply glut and shrinking demand, the industry is keenly looking forward to the economic situation of major consuming countries for support. A partial support came from the data released by the China Logistics Information Centre, which showed that China’s Manufacturing PMI rose to 50.4 in August. This is better than July’s value and is also higher than the market’s expectations of 49.9. The reading above 50 indicates the expansion of manufacturing activity. This better-than-expected factory data gave support to copper prices as healthy manufacturing activity in China implies a healthy demand for copper. But this support was short lived as the US dollar weakened due to weaker-than-expected manufacturing data for US which showed the ISM Manufacturing PMI data as 49.4 in August. This was disappointing, as the market expected a manufacturing PMI reading of 52. This weaker-than-expected data weighed on the US dollar pulling down the scope of sustained improvement in copper prices. 

In spite of the marked gloom encircling the copper market, the silver lining comes from the improvement in the apparent demand of copper in China. Copper’s apparent demand has been better-than-expected this year on the rise in Chinese construction activity coupled with an increase in the country’s bonded stocks. The supply side of the equation has also been somewhat supportive of copper prices. Along with the curtailments by companies like Freeport-McMoRan (FCX) and Glencore (GLNCY), weather-related disruptions in Chile, which is the world’s largest copper producer, have prevented the market from moving to a larger surplus. Other positive developments in global economy supporting copper market are coming from US and Japan. In the United States, the No. 2 copper user, the two leading presidential candidates have pledged to step up spending on infrastructure if elected. In Japan, Prime Minister Shinzo Abe’s government is embarking on a plan to spend $77.5-billion Canadian on infrastructure. Thus, though for the short term there is no support to the copper industry, the long term investors should stay invested and refrain from panicking.

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