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Tuesday, 19 January 2016

Demand Crises Deepens in Copper Industry

Copper's widespread use across different industries means it is often viewed as an indicator of global economic health, with declining prices indicating waning demand and a forthcoming slowdown. The new consumer driven economic policy of China has added increased pressure on the copper and other metal markets. China’s demand for raw materials has cooled off significantly, as it has tried to shift its economy away from construction, investment and exports to one driven by consumption and services. The transformation is already jolting countries in Africa, from those with diversified economies, like South Africa, to those dependent on a single export, like Zambia or Angola, even as the Chinese government and businesses express long-term commitment to the continent. It has also affected the major mining countries in Latin America.
Apart from the basic copper mining countries, the slowdown in demand has also taken its toll on the economic activities of the developing countries like India. Indian copper demand is likely to expand by 7 per cent a year as more investment in power and infrastructure industries boosts usage of the metal. With the global mining industry reeling from a slowdown in top user China, the world is looking to India for the surge in demand. More government spending and emphasis on expanding manufacturing should significantly raise annual copper demand. Amidst the lows in the global copper market, the Indian counterpart is also seeking increased support from the government to stay afloat. Copper sector, which is facing a crisis due to falling prices and cheap imports, today urged the government to eliminate the bottlenecks to ensure sustained growth. The major issues of Indian copper industry are inverted duties due to free trade agreements (FTAs), improvement in the anti-dumping duty and withdrawal of export incentives.
Coming to the basics, the production of copper has continued with supply surplus situation. Global production increased around 3 per cent in the first eight months of 2015, according to the International Copper Study Group (ICSG). Only two of the top 10 producers have signaled their intent to buck this trend. US-based Freeport-McMoRan, the second biggest copper miner, will cut 113,000 tonnes, while Glencore, the number three, will slash 455,000 tonnes – just under a third of its total. Last week Glencore began to suspend work at its Mopani mine in Zambia, laying off 4,300 workers. For the rest, cutting production to prop up prices runs the risk of missing out when they rise. As per ICSG there is a surplus of around 70,000 tonnes of copper, but accounting for “unreported” stocks in China, there is an expected shortfall of 5,000 tonnes. World refined production is estimated to have increased by 1.6 per cent (235,000 MT) in the first eight months of 2015 compared with refined production in the same period of 2014. Primary production was up by 1 per cent and secondary production (from scrap) was up by 3.5 per cent. The main contributor to growth was China (up by 4 per cent), followed by the Philippines and Indonesia where production was reduced in the first quarter of last year due to operational constraints. Production also increased in the DRC (+8 per cent). Output in Chile and Japan (the second and third leading refined copper producers) declined by 3 per cent and 2 per cent, respectively, while in the United States (the fourth largest producer of refined copper), production dropped by 7 per cent. Despite cut in the production from major mining giants, Australian miners are still producing more and are ready to expand production. The weaker Australian dollar is obviously an advantage for miners Down Under, which has cushioned the impact of the drop in US dollar-denominated copper prices. They are gaining market share and it will thus be in their interest to keep extracting as much of the stuff as possible, in theory until such a time that marginal costs from additional units of production equal marginal revenues from those units sold. So much like the oil market situation, the glut is likely to remain in place in the near term and thus weigh on prices. But in the long term, the market should naturally tighten and prices recover. Apart from Australian miners, there are still many producers unwilling to cut production despite the low prices. Codelco, expressed that they won't cut copper production as prices slump, pointing to the fact that if the company suspends production, then it would be difficult to restart, so they would rather try to lower costs. Also, there is skepticism about how many of the announced cuts will actually be made, and how long they will last.
The current demand situation for the global copper is not so encouraging with practically any indication of change in Chinese policy which could spark sudden spike in demand. The bigger players are gambling that a price recovery will come before pressure mounts to cut costs further. China may be slowing, but estimated GDP growth of 6.5 per cent a year was still grounds for optimism. Its role in electrics and consumer devices will keep it in demand in economies that are moving beyond heavy industry, such as China. In the first eight months of 2015, world apparent usage is estimated to have declined by around 2 per cent (295,000 MT) compared with that in the same period of 2014. Excluding China, world usage declined by around 4 per cent. Although Chinese apparent demand increased by around 0.5 per cent, usage declined by 5 per cent and 7 per cent in the EU and Japan, respectively, and by 50 per cent in Russia (following the withdrawal of Russia’s cathode export tax in September 2014). 
On the economic front, data showed US job growth increased solidly in November, which most likely will pave the way for the Federal Reserve to raise interest rates in December for the first time in nearly a decade. The stronger-than-expected jobs data failed to boost the US dollar much, perhaps because many investors had already bought the US currency in anticipation. A firmer US dollar usually weighs on metals priced in the US currency, making them more expensive for buyers outside of the United States.
Despite recent gains, copper prices are down 11 per cent since the start of November as a combination of a stronger dollar and persistent worries over future demand prospects from China weighed. The Asian nation is the world’s largest copper consumer, accounting for nearly 45 per cent of world consumption. A sustained price recovery needs better demand. In China, a property fit-out cycle remains on track for 2016, but infrastructure construction prospects appear weaker if our recent China trip is any guide. Supply cuts are needed to rebalance markets, but cost deflation means cost curves (and market clearing prices) are falling.
On the whole, metal prices are expected to continue heading lower. China, emerging market and European demand worries, a strengthening U.S. dollar, along with investors that see a potential corporate debt crisis, should continue to keep the base metal complex subdued into early 2016.

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