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Wednesday, 28 December 2016

Increased Chinese Support Sustained Northward Surge in Copper Prices

The copper market scenario has been improving in the last couple of month owing to the improvement in the Chinese demand though the supply of copper continues to be on the surplus side. The prices have also found support from the series of supply disruptions at major mines. The changes in the global economic scenario and more impetus on the growth have also adequately supported the price rally in copper. The trend has been positive but it’s too early to assume that the market has overall entered the bull phase.
On the supply front, World mine production is estimated to have increased by around 5.8 per cent (730,000 MT) in the first eight months of 2016 compared with production in the same period of 2015. Concentrate production increased by 7.5 per cent while solvent extraction-electro-winning (SX-EW) declined by 0.5 per cent. The increase in world mine production was mainly due to a 45 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 4 per cent decline in production in Chile, the world’s biggest copper mine producer, and a 7 per cent decline in DRC where output is constrained by temporary production cuts. The average world mine capacity utilization rate for the first eight months of 2016 increased to 85 per cent from 84 per cent in the same period of 2015. World refined production is estimated to have increased by about 3.1 per cent (470,000 MT) in the first eight months of 2016 compared with refined production in the same period of 2015: primary production was up by 2.5 per cent and secondary production (from scrap) was up by 5.5 per cent. The main contributor to growth was China (+7 per cent), followed by the United States where production increased by 14 per cent and Mexico (+19 per cent) where expanded SX-EW capacity is contributing to refined production growth. Output in Chile and Japan the second and the third leading refined copper producers increased by around 2 per cent and 3 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 eight months of 2016 remains practically unchanged from that in the same period of 2015 at around 83 per cent.
During the same period, world apparent refined usage is estimated to have increased by around 3.8 per cent (570,000 MT) compared with that in the same period of 2015 mainly due to increases in China. Chinese apparent demand increased by around 7.5 per cent compared with the same period of 2015 based on an 8 per cent increase in net imports of refined copper. However July and August net refined copper imports at 176,000 MT and 175,000 MT respectively were the lowest since April 2013 and compares to a net monthly imports average of 312,000 MT in the first half of 2016. Aggregated usage in the EU, Japan and the United States remained essentially unchanged.

Global copper consumption is recovering as well, led by China. China’s refined copper consumption will probably rise by around 7 per cent this year led by strong demand for power cable, high performance sheet and strip for the auto and computer appliance sectors, by a recovery in magnet wire demand, and general demand as the economy recovers. China’s infrastructure spending is and will continue to be a multiple of whatever the US’s will be under its new president. For instance, in the first 10 months of this year, China’s spending on infrastructure alone was $1.4tn and it will probably spend as much if not more in the next 10 years as in the last since government plans to migrate another 200m from the rural areas to the urban world, making a migration of some 400 million over 20 years.
The global demand of copper has expanded by about 1per cent by December 1st 2016 and is been adequately supported by the positive growth figures from E7 and G7 monetary data. Global policy has shifted from focusing on austerity to one of inflating the global system. What is missing from most equations is that when this shift starts, inventory moves out of the raw material chain into refilling the massive global manufacturing chain from the final product, such as a transformer or an aircon, all the way through the individual sectors to the semi-fabricator, which of course has been emptied in recent years. As per a report world refined consumption will probably rise by 4.5 per cent both in 2016 and 2017 and at least by 2.7 per cent in 2018. These numbers clearly indicates larger supply and demand deficits resulting in significantly positive copper prices.
A number of recent disruptions in the global copper supply show that the metal’s price rally is supported at least in part by fundamentals. About 415,000 tonnes of copper have been lost so far this year due to disruptions, the majority of which have occurred in recent months. The halt in operations at UK-based Anglo American’s central Chile mine began on November 17 following a dispute over negotiations with contractor companies. On November 17, a landslide caused by heavy rains at Park Elektrik √úretim Madencilik Sanayi ve Ticaret AS’ Siirt Madenk√∂y mine in Turkey caused at least five worker deaths. Operations have been halted this situation is likely to continue till early next year. In addition, overall production in Chile has slipped this year, with year-to-date output falling 4.7 per cent to 4,581,000 tonnes from 4,808,000 tonnes in 2015. Production in October declined to 445,000 tonnes, off 3.4% month-on-month and 11 per cent year-on-year.
The positive PMI Data released by Caxin Services (53.1 against the expectation of 52.7) provided increased support to the copper prices. News of Chinese fund buying and supply disruption of copper concentrate supplies from Mongolia which generally feed the smaller smelters supported the unconfirmed reports that fabricators in China have yet to fully meet their buying requirements. China continues to be the key driver of sentiment, and prices have been susceptible to volatile moves as they are directed by news flow. As long as Chinese demand remains healthy, the risk of a sudden and rapid reversal in the short term remains low. In addition, copper is benefiting from a supply side experiencing sudden tightness. Despite positive market sentiment surrounding copper prices, downside risks are quite high due to a practical growth outlook for China and the USA, as well as the probability of an oversupplied market next year. Thus, in spite of the positivity gripping the copper market, one should invest in the market with caution.

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