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Thursday, 16 June 2016

Low Uncertain Demand for Copper Dampens Investment Sentiments

Copper continues to driver of the global economy as the socio - economic development of the country is measured in terms of its per capita consumption. Increased economic activity leads to increased consumption of copper and other related metals. As for the price, commodity markets are cyclical in nature. Each raw material market has its individual characteristics. So many factors contribute to whether the price of a commodity moves higher or lower. While commodity production is often a localized affair, consumption is ubiquitous. Therefore, deficit conditions or periods of oversupply occur often as a result of weather or other acts of nature, political events, and a myriad of other factors. 

The copper market as of now is gripped with the slowness of demand as the economic growth in China has slumped to below 7 per cent. Considering the fact that China is the biggest consumer of base metals, the economic situation of China will have an impact on copper prices. The copper has been under pressure recently after a reading of Chinese manufacturing activity showed that Beijing's economic stimulus program is beginning to run out of steam. Fears of devaluation in the renminbi compounded the pressure on the copper price as China is responsible for 46 per cent of total global copper demand of some 22 million MT. Another factor that pushed copper to three month lows earlier this week is robust supply. More than 750,000 MT of annualized supply was idled in 2015 by companies including Freeport McMoRan and Glencore in response to low prices, according to a report by consultants Wood Mackenzie, but producers are looking far more resilient in 2016 and curtailments this year are unlikely to exceed 150,000 MT. In addition some major projects are ramping up this year including China Minmetals' Las Bambas mine and Freeport's Cerro Verde expansion project in Peru.

The demand and supply dynamics of copper continues to be exceedingly dominated by the supplies. World mine production is estimated to have increased by around 3 per cent (100,000 MT) in the first two months of 2016 compared with production in the same period of 2015. Concentrate production increased by 4 per cent while solvent extraction-electro-winning (SX-EW) remained essentially unchanged. The increase in world mine production was mainly due to a 54 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 Indonesia and the United States and a ramp-up in production in Mongolia also contributed to world growth. However overall growth was partially offset by a 6 per cent decline in production in Chile, the world’s biggest copper mine producer and a 13 per cent decline in DRC where output is constrained by temporary production cuts. World refined production is estimated to have increased by about 4 per cent (135,000 MT) in the first two months of 2016 compared with refined production in the same period of 2015: primary production was up by 4 per cent and secondary production (from scrap) was up by 2 per cent. The main contributor to growth was China (+6 per cent), followed by the United States where production increased by 25 per cent. Output in Chile and Japan the second and third leading refined copper producers, increased by 3 per cent and 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 two months of 2016 increased to 84 per cent from 83 per cent in the same period of 2015.

Apart from China, United States is the second largest copper consumer, accounting for 9 per cent of global copper consumption. Strong housing and automotive demands bode well for US copper consumption. In fact, the US economy is improving and that was why we can expect some surge in the copper prices. But, this surge is unlikely to be supported for long term as profit growth at China’s industrial firms showed signs of slowing in April, in line with other data for the month which suggested the economy may be losing steam again after picking up earlier in the year.
The uncertainty and low phase of copper is attributed to the slow economic activity in China, weak forecast for global economic growth and increasing strength of USD. Recently, the dollar has appreciated, and the U.S. Federal Reserve has reiterated their intentions to hike interest rates this summer and many commodities have either moved lower or stopped their upward trajectory. The dollar is the reserve currency of the world and the pricing mechanism for most raw materials around the world. A stronger dollar is not supportive of a continuation of the recovery in commodity prices. Commodity prices are highly sensitive to interest rates around the world. When interest rates are high, it costs more to carry inventories of raw materials. Therefore, consumers tend to become hand to mouth regarding their requirements. Low interest rates are positive for commodities, and we continue to live in an environment of some of the lowest interest rates ever on record. Interest rates remain in negative territory in Japan and Europe - it costs money to store money in the bank.

As regards to copper in the recent times, Copper consumption estimates for China are being revised up. Huge spending on copper-intensive power infrastructure on the state grid in 'rural areas' will continue through 2012 (12 bn RMB). Beijing has also renewed the 'home appliance subsidy scheme' and is promoting electric cars, which are twice as copper-intensive as conventional vehicles. Moreover, in spite of the slowdown, China has been a shining example of overall economic growth, growing at an annual rate of 9.9 per cent between 1980 and 2010. Most forecasts do not have China slowing down anytime soon; the IMF predicts China's economy will expand at an annual rate of 9.7 per cent over the next 5 years. One of the largest drivers of copper will be the growth of the Chinese consumer. Now one billion Chinese have become consumers, salaries have increased, and domestic consumption will continue growing faster than GDP (which in itself is projected to grow 500 per cent by 2025). 

In the current demand scenario the actual copper trade has almost vanished from the market. As per observation producers and consumers of industrial metals are mostly absent from the market. They have left the field wide open for funds that buy or sell on signals from models using numerical relationships; one of these involves the U.S. currency, which when it falls makes dollar-denominated commodities cheaper for foreigners. Selling pressure from the dollar continues to cap the market as well as weak manufacturing data from China. Chinese manufacturing and trade data from the over the week-end reinforced doubts about demand. Thus, the investment sentiment continues to be in doldrums and fresh investors need to wait for some more time before making an entry.

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