Copper market dynamics are largely being guided by the way Chinese demand as China, is world's second-largest economy, also a biggest commodity consumer, accounting for about 45 per cent of the global demand. The price of copper has maintained lower ebb ever since the slowdown in Chinese economy commenced. In the times before 2014, China controlled the market as a growing industrialized nation with an enormous geographic scope and a breakneck growth rate, China became a large consumer of raw materials and commodities. A cheap dollar over the past six years only accelerated these themes, as it made the relative cost of these commodities cheaper on a per-unit basis, all factors held equal. Copper had significantly wider industrial usages than Gold or Silver, and was often be found in electrical wiring. Copper has been the preferred electrical conductor in pretty much every area of wiring with the exception of overhead electric power transmission, in which aluminum is often used. This meant that a growing, industrialized economy was using more of copper, as wiring was going to be a necessity as a country was building its infrastructure.
But Chinese growth began to slow heavily from the 10 per cent growth rates seen for much of the decade leading into 2014, down to 8 per cent; followed by a 7.5 per cent growth target in March of 2014, and then a target of ‘around 7 per cent’ in March of 2015, and most recently, a 6.5 per cent target set for 2016 to 2020. This slowing of growth has had a dramatic impact on Commodity prices, and perhaps one of the best markets to look at for this evidence is in Copper. As China slowed, Copper prices have seen a significant move as this demand for Copper’s industrial usage has waned. After that high in February of 2011, Copper prices have moved down by more than 53 per cent. In the current scenario, we can derive the expectation for additional weakness in metals prices, and this can lead to additional pain for economies with significant mining operations, as lower Copper prices will squeeze margins, and that leads to less hiring, lower wages (or fewer wage increases) and an overall contraction in business. Following the trend’s weakness the copper prices are down almost 30 per cent over the past year. On the contrary the Chinese stocks are up over 40 per cent leading to sustained weakness.
According to the ICSG, China is expected to drive copper production and demand growth in 2016 and 2017. The ICSG also added that the demand is expected to stay the same in 2016 but forecasted to grow by 1.8% in 2017, mainly supported by the increase in industrial demand from China. The latest copper market forecast report released by the International Copper Study Group (or ICSG), the market will be very close to supply-demand balance in 2016 and 2017, and China is expected to be the biggest contributor to supply and demand growth. China is expected to add about 550,000 tonnes both in smelting and refining capacity next year versus 500,000 tonnes in smelting capacity and 450,000 tonnes in refining capacity this year.
Amidst the major supply side indicators, China is the largest producer of refined copper in the world, it accounts for over one-third of the global refined copper production followed by Chile and Japan. Chile’s refined copper production has fallen 5.2 per cent YoY (year-over-year) in the first seven months of 2016 compared to the same period last year. The country’s copper production has been impacted negatively by a range of issues from floods to labour problems. Chinese copper production has continued to rise in 2016. In the first eight months of 2016, China’s copper concentrate imports rose ~34 per cent YoY. It’s important to note that China’s copper smelting and refining capacity has expanded at a fast pace in the last decade. As a result, the country imports large amounts of concentrates. On an annual basis, the net imports of refined copper rose 9 per cent year-on-year. For the first half of 2016, net refined imports reached 1,874kt, rising 20 per cent year-on-year from H1 2015’s 1,559kt. It processes the concentrates domestically. This helps job creation in China. Higher copper concentrate imports are reflecting in China’s copper production. Production has risen 8 per cent YoY in the first eight months of the year. According to the data released by National Bureau of Statistics on September 19, China’s copper output rose to almost a six-month high in August. According to the data, the output rose to 743,000 metric tons in August. This is higher than July’s output of 722,000 metric tons. It’s also higher than the output of 663,000 metric tons in August last year. Copper started the day on a weaker note amid an increase in China’s output. However, it recovered losses amid a weaker dollar. Chinese copper exports have also been rising over the last few months, while its refined imports have fallen. Since the increase in Chinese copper imports wasn’t exactly backed by end user demand, some of the Chinese refined copper imports found their way into SHFE (Shanghai Futures Exchange) warehouses. As a result, SHFE copper inventories rose to record highs in March.
In the second half of 2016 the copper scenario seems to be improving with investment stimulus being pushed into the Chinese market, stable dollar and improvement in demand. Thus, in spite of the gloom surrounding the copper market at present, the future is showing signs of recovery. China's demand for copper is expected to rise 4-4.5 per cent in the later part of 2016 and 2017, with the exact level depending on economic growth, investment in power projects and bank credit to small- and medium-scaled factories. State investment in the power sector is expected to rise next year after slowing in 2015. Still, copper is used only when grids fund projects and place orders for power cables and wires. China is likely to spend at least 2 trillion yuan ($315 billion) to improve its power grid infrastructure over the 2015-2020 period, which an executive at a state-owned copper producer told Reuters could consume some 1.3 million tonnes of refined copper. Refined copper production may rise from 6-7 per cent to 7.87-7.94 million tonnes in 2016 as production at new smelters that came on stream this year and last year rises gradually, said He. Growth expected for this year is 7.7 per cent. These, alongside a steady increase in demand from China’s electric vehicle sector of around 200,000 tonnes over the next five years, account for more than 2 million tonnes of copper, compared with current forecasts on total copper consumption over the period of about 105 million tonnes.
Amidst so much of positivity flowing in the Chinese Economy, the copper prices have been working higher in recent days and given recent weeks has been London Metals Weeks when the global industry gathers, the price performance suggests sentiment is far from bearish and possibly even getting a bit more bullish. Tin price are ramping higher, given the shortages in LME stocks that is not surprising and without the backwardation flaring out, the market seems relatively orderly. Finally, the market had become too complacent about the bearish China trade and the rebound since mid-January caught many in the market wrong-footed. A counter-trend move is now in progress; given the low level of LME stocks and rising prices, a period of restocking may ensue.