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Wednesday, 21 June 2017

Short Term Optimism Fading Away Amidst Subdued Demand

Copper has rallied 40 per cent since January 2016, erasing all losses since May 2015. Investors have become increasingly optimistic about the metal’s prospects with speculative positioning in copper futures recently hitting an all-time high, more than 2.5 times its historic average. While the price of the metal remains 40 per cent below the peak reached in 2011, the supply disruption is keeping further fall of prices under check. The major driving factors maintaining the bullish phase in the copper market has been the several mine outages. Workers at the world’s largest copper mine, Escondida in Chile, have been on strike for three weeks and negotiations between unions, the mine operator (BHP Billiton) and government mediators have yet to be scheduled. The world second largest copper mine, Grasberg, operated by Freeport-McMoRan Inc., has also faced outages. The Indonesian government has not renewed Freeport’s copper ore export license that expired in February 2017. The Grasberg mine is also facing difficulty selling domestically, with PT Smelting (its sole domestic offtaker of copper concentrate) expected to be on strike until March. The Las Bambas mine in Peru has had its roads blocked by protestors who want the government to invest more in local infrastructure rather than just mine infrastructure. The three mines account for close to 12 per cent of global mine capacity. Outages in 2016 were usually low, accounting for less than 1 per cent of expected supply, but that could rise substantially in 2017 if the issues at Escondida, Grasberg and Las Bambas are not resolved soon. 

World mine production is estimated to have declined by around 2 per cent in the first two months of 2017, with concentrate production declining by around 1 per cent and solvent extraction-electro-winning (SX-EW) declining by 5 per cent. The major decline in the production can be associated to a 10 per cent decline in Chilean mine production negatively affected by the strike at Escondida mine and lower output from Codelco mines. The decline in Canada and Mongolia concentrates production are 19 per cent and 23 per cent, respectively, mainly due to lower grades in planned mining sequencing. The 10 per cent decline in Indonesian concentrate production was reported as output was constrained by a temporary ban on concentrate exports that started in January and ended in April. However, the overall decline was partially offset by an 18 per cent and 15 per cent rise in Mexican (concentrate and SX-EW) and Peruvian (concentrate) output, respectively, both countries benefitting from new and expanded capacity that was not yet fully available in the same period of last year. On a regional basis, production rose by 5 per cent in Europe (including Russia) and 10 per cent in Oceania while declining by 4 per cent in the Americas and 6 per cent in Africa, and remaining essentially unchanged in Asia. 

World refined production is estimated to have remained essentially unchanged in the first two months of 2017 with primary production (electrolytic and electro-winning) declining by 3 per cent and secondary production (from scrap) increasing by 11 per cent. Increased availability of scrap allowed world secondary refined production to increase, notably in China. The main contributor to growth in world refined production was China (increase of 4 per cent) followed by Mexico (14 per cent) where expanded SX-EW capacity contributed to refined production growth. However, overall growth was partially offset by a 16 per cent decline in Chile, the second world leading refined copper producer, where both primary electrolytic refined production and electro-winning production declined. Production also declined in the third and fourth world leading refined copper producers, namely, Japan (in electrolytic production from concentrates) and in the United States (mainly in electro-winning output). On a regional basis, refined output is estimated to have increased in Asia (3 per cent), in Africa (2 per cent) and in Europe (including Russia) (1.5 per cent) while declining in the Americas (11 per cent) and in Oceania (5 per cent).

On the demand side, development in China remains in the forefront. The country now accounts for 49 per cent of the annual global copper consumption. In 2017, the demand should increase 4.6 per cent and reach 11.2 million MT. Other sales regions like Europe (EU-28: plus 0.2 per cent to 3.1 million MT) and the USA (plus 1.7 per cent to 1.8 million MT) admittedly cannot keep up, but they definitely are showing positive performance. The Chinese copper producer Jiangxi Copper estimates China’s copper demand in March 2017 at 822,500 MT, an increase of 22 per cent compared to February 2017 (676,500 MT). Stimuli came from the construction industry as well as heating and air conditioning. This is also reflected by the quarterly figures from the sectors. Investment in real estate rose by 9 per cent compared to the previous year to a converted value of US$ 289 billion. In April, the domestic sales of air conditioner units are expected to have risen to 7.85 million MT., an increase of 69.8 per cent over the previous year, and exports are expected to have risen by 5.4 per cent to 6.78 million MT. Furthermore, there is talk of a reduction in available cathode inventories. Cathode exports from China also decreased from 44,000 MT for March to 19,000 MT in April. There’s also the more fundamental argument that the use of imported copper for financing purposes is no longer playing a large role and that the reduced import volumes represent a return to normal conditions.

In the recent times the refined production is growing by 1.7 per cent and refined usage is only growing by 1 per cent. A 2 per cent increase in refined copper use would see the market remain in a deficit. Global manufacturing PMIs are at a 34-month high and could rise to a 6-year high this year. Given the growth in manufacturing and infrastructure spending, we believe that demand is likely to surpass the supply in the coming months. The development in China on the demand side is likely to keep the underlying strength in the market intact. Ahead of the 19th National Congress of the Communist Party of China to be held in September 2017, Chinese authorities would be seeking political stability which suggests that economic stimulus is likely to remain in play, which would favour continued spending on infrastructure and strong demand from the manufacturing sector. 

We should remain positive of the developments in China because the shift away from manufacturing and towards consumption is not necessarily negative for copper. For example, the copper intensity of cars will rise with the growth of electric vehicles. Regular cars contain approximately 20 Kg of copper. Electric vehicles consume about 80 Kg of copper. While electric vehicles account for less than 1 per cent of global sales, consensus estimates that it will rise to 4 per cent by 2025, proving an additional source of demand. Thus, we can say that all is not gloomy for the Copper Industry as it seems as on date, things have been improving as depicted by the glimpse of the expected growth in the Automobile Sector.

Tuesday, 9 May 2017

Copper Feeling Pressure of Extended Consolidation

The copper market has been trending downwards for the last couple of months and is feeling the pressure of the extended consolidation and lack of support from the global economic scenario. The copper prices are undergoing some downward pressure that is mainly related to policy revisions in Beijing. The short-term costs of borrowing presented the highest level in two years, which had a negative impact on the Chinese housing sector. The supply side continues to be robust amidst continued low demand, though the future of the demand scenario continues to post a bright future. In the latest Commodity Markets Outlook quarterly report, the World Bank estimates that copper prices will surge by 18 per cent in 2017. The analysis of the supply and the demand would better clarify the entire picture.

On the supply front, World mine production is estimated to have increased by around 4 per cent in January 2017 year on year, with concentrate production increasing by around 5 per cent and solvent extraction-electro-winning (SX-EW) declining by 2 per cent. The increase in world mine production has been mainly due to 25 per cent rise in Peruvian concentrate output that benefitted from new and expanded capacity that was not yet fully available in January 2016. However, January 2017 production was 6 per cent lower than the average production level in the 4th quarter 2016 and a 22 per cent increase in Mexican mine production (concentrate and SX-EW) that benefitted from expanded capacity brought on stream during last year. However overall growth was partially offset by a 2.5 per cent decline in production in Chile, the world’s biggest copper mine producer. No major supply disruption occurred in January in Chile and the decline was mainly due to a reduction in SX-EW output at some mines. Indonesian production was constrained by a temporary ban in concentrate exports that started during the month. On a regional basis, production rose by 3 per cent in the Americas, 6 per cent in Asia, 4 per cent in Europe and 10 per cent in Oceania while remaining essentially unchanged in Africa.

The details of Chinese Mine production show’s a price positive picture for the global market. According to the National Bureau of Statistics, China produced 764,000 MT of copper in March and achieved growth of 7.3 per cent in the first quarter of 2017 compared to the previous year’s period, with production for the first quarter totaling 2.13 million MT. There had been maintenance shutdowns at larger smelters such as Tongling, Yunnan and Shangdong Fangyuan. The higher copper price and good availability of raw materials are said to have been key to the high production level. Concentrate imports totaled 1.63 million MT in March 2017, compared to 1.37 million MT in March 2016. 

World refined production is estimated to have increased by about 2 per cent in January 2017 with primary production (Electrolytic and Electro-winning) remaining essentially unchanged and secondary production (from scrap) increasing by 13 per cent. Increased availability of scrap allowed world secondary refined production to increase, notably in China where the upward trend started in 4th quarter 2016. The main contributor to growth in world refined production was China (increase of 10 per cent) followed by Mexico (16 per cent) where expanded SX-EW capacity contributed to refined production growth. However, overall growth was partially offset by a 10 per cent decline in Chile, the second world leading refined copper producer, where both primary electrolytic refined production and electro-winning production declined. Production also declined in Japan (mainly in electrolytic production from concentrates) and in the United States (mainly in electro-winning output). On a regional basis, refined output is estimated to have increased in Asia (6 per cent), in Africa (3 per cent) and in Europe (including Russia) (2 per cent) while declining in the Americas (6 per cent) and remaining essentially unchanged in Oceania.

In comparison to the rise in mine supply by 4 per cent the refined usage is estimated to have increased by around 1.8 per cent in January 2017. Preliminary January data indicates that world ex-China usage growth at 1.9 per cent was slightly higher than growth in Chinese apparent demand. Chinese apparent demand (excluding changes in unreported stocks) increased by only 1.7 per cent because although refined copper production increase by 10 per cent, net imports of refined copper declined by 17 per cent. Usage growth in other Asian countries as well as in some countries in Europe contributed to world growth. On a regional basis, usage is estimated to have increased by 2 per cent in Asia (when excluding China, Asia usage increased by 3.5 per cent) and by 3.5 per cent in Europe, while declining in all the other regions.

The recent supportive factor considered by the World Bank for sharp hike in the sentiments is the supply disruptions in the major mines. The world’s largest mines have had to cope with constraints in operations. In total, there was a 43-day strike at Escondida, which is the world’s largest copper mine. This strike ended without resolution in the end of March 2017. Furthermore, the Indonesian government implemented export policy restrictions in January 2017 that included the implementation of rules, which put restrictions on copper exports in order to give a boost to its’ inland refinery production. Consequently, production at Grasberg, which is the world’s second largest-mine, was stopped. Lastly, there was a flood in Peru, which is the world’s second largest copper producer. This natural disaster had also a negative impact on production output.

Another factor working in copper’s favor is the copper/gold price ratio, which is currently hovering at 0.14. This is near to its all-time data set low of 0.10 last seen at the depths of the U.S. Housing bubble. Traditionally, anything below 0.15 has provided an extremely attractive price point on which to enter. Should the ratio revert to the mean between 0.2-0.25, at today’s gold prices, copper would be valued between $8,300-10,375 a MT, an incredible premium to today’s prices. The copper supply deficit expectation was slowly gaining traction in the investment community which likely to provide bottom hand support to the copper prices. As per some analysis, the copper supply may be coming into deficit for the first time in six years. 

Some word of caution is likely to flow in from BHP, the world's second-biggest listed copper miner which is planning to hike its annual exploration spending by 29 per cent this year, allocating nearly all its $900 million budget to finding new copper and oil deposits. It is looking for more mining in Chile, Peru, the US, Canada and South Australia, as well as eyeing new partnerships to boost its growth pipeline. The deficit is expected to emerge as grade declines, a rise in costs and a scarcity of high-quality future development opportunities are likely to constrain the industry’s ability to cheaply meet this demand growth. In the end, copper prices are undergoing some downward pressure that is mainly related to policy revisions in Beijing. The short-term costs of borrowing presented the highest level in two years, which had a negative impact on the Chinese housing sector. The Chinese housing sector takes around 50 per cent of the total copper demand coming from the country.

Friday, 7 April 2017

Lack of Sustained Support Keeps Copper Market in Doldrums

The continued weakness in the red metal is seen as an economic uncertainty in expansion of demand. Copper has been a volatile market for most of the past year. Beginning in January 2016, prices saw a slide following the reports of a soft landing for China’s economy. Copper is a key material used in industrial infrastructure, and China uses about 45 per cent of the world’s supply, so any kind of movement in their economic outlook is likely to be reflected in the price of copper around the world. The increased supply of copper against stable demand but low demand is continuously pressuring the copper market.

In 2016 world mine production is estimated to have increased by around 5 per cent, or 1 million MT, with concentrate production increasing by 7 per cent and solvent extraction-electro-winning (SX-EW) declining by 2 per cent. The increase in world mine production in 2016 was mainly due to a 38 per cent (650,000 MT Cu) rise in Peruvian concentrate output that benefitted from new and expanded capacity brought on stream in the last two years, a recovery in production levels in Canada, Indonesia and the United States, and expanded capacity in Mexico and low frequency of supply disruptions due to strikes, accidents or adverse weather conditions. However overall growth was partially offset by a 3.8 per cent (220,000 MT) decline in production in Chile, the world’s biggest copper mine producer, and a 4.5 per cent decline in DRC where output is being constrained by temporary production cuts. On a regional basis, production rose by 6 per cent in the Americas and 11.5 per cent in Asia but declined by 3.5 per cent in Africa while remaining essentially unchanged in Europe and Oceania World refined production is estimated to have increased by about 2.5 per cent (530,000 MT) in 2016 with primary production (Electrolytic and Electro-winning) increasing by 3 per cent and secondary production (from scrap) declining by 2 per cent. Increased availability of concentrates allowed world primary electrolytic refined production to increase by 4.5 per cent. The main contributor to growth in world refined production was China (increase of 6 per cent, or 470,000 MT), followed by the United States and Japan where production increased by 7 per cent and 5 per cent respectively and by Mexico (16 per cent) where expanded SX-EW capacity contributed to refined production growth. However, overall growth was partially offset by a 3 per cent decline in Chile, the second world leading refined copper producer, although primary electrolytic refined production increased by 4.5 per cent, electro-winning production declined by 6.5 per cent due to definitive / temporary closures of SX-EW mines. Production in the DRC and Zambia also declined by an aggregated 11 per cent mainly due to the impact of temporary production cuts. On a regional basis, refined output is estimated to have increased in the Americas (1 per cent) and Asia (6 per cent) while declining in Africa (10 per cent) and in Europe (including Russia) (2 per cent) and remaining essentially unchanged in Oceania.

Worldwide copper production continued to grow in 2016 as it has for all but three of the past 22 years. World copper production has increased 105 per cent since 1994, when the U.S. Geological Survey began estimating global output. While investment in copper mines has slowed significantly from the 2003-2013 to the recent times, the production is still climbing. Given the rebound in the price of copper, we estimate that mines, on average, are earning returns of over 20 per cent on an all-in cost basis, and that the cash margin of producing copper (ignoring overhead costs, depreciation and amortization of equipment) is around 60 per cent.

World apparent refined usage is estimated to have increased by around 2 per cent (430,000 MT) in 2016. Growth was mainly due to an increase in Chinese apparent demand as world usage excluding China is estimated to have increased by only 0.9 per cent. Chinese apparent demand (excluding changes in unreported stocks) increased by around 2.5 per cent based mainly on 6 per cent growth in refined production as in fact net imports of refined copper declined by 7.5 per cent. Usage in the United States and Japan, the second and third leading refined copper using countries, is down by 2 per cent and 2.5 per cent respectively. On a regional basis, usage is estimated to have increased by 3 per cent in Asia (when excluding China, Asia usage increased by 3 per cent) and by 2 per cent in Europe (by 1.5 per cent in the EU), while declining by 3 per cent in the Americas World refined copper balance for 2016 indicates a deficit of around 50,000 MT (including revisions to data previously presented). This is mainly because of a 2.5 per cent increase in Chinese apparent demand. In developing its global market balance, ICSG uses an apparent demand calculation for China that does not take into account changes in unreported stocks [State Reserve Bureau (SRB), producer, consumer, merchant/trader, bonded]. In 2016, the world refined copper balance adjusted for changes in Chinese bonded stocks indicates a deficit of around 42,000 MT. The refined copper market balance for the month of December 2016 showed a small surplus of around 20,000 MT.

On the price front, the upside rally in the price was supported by the fact that China’s economic growth rate stabilized, and even improved slightly. The election of Donald Trump as President had promised increased of fiscal stimulus and significant expansion in infrastructure. The strike at the Escondida mine in Chile which produces 5 per cent of the world’s copper also provided partial support. In the last couple of months, the above stimulus to price have once again given way to increased uncertainty in demand leading to surplus supplies owing to the ending of the workers strike at Escondida, the Trump agenda is running into trouble in Congress and the uncertainty on China’s being be able to boost or even maintain its growth rate. 

In spite of the gloom and uncertainty persisting in the market, the silver lining is noticed in the form of China showing some signs of recovering as more policy stimulus is introduced, at least judging by the rebound in the equity market. In the recently concluded Metal Bulletin’s Copper Conference, experts have opined prices are slightly elevated and given the stock rises, ample availability of copper cathodes and lower premiums but a move towards larger deficits should underpin prices later in the year. The overall outlook for copper seems mildly bullish but there is concern about the high level of copper cathodes stocks, which should be able to delay any impact of concentrate shortages. So there does not seem to be any need for consumers to chase prices higher.

Wednesday, 5 April 2017

Positive Consolidation in Copper Continue Amidst Increased Supply Disruptions

The copper market continues to consolidate in the tight range as fundamentals driving it has remained consistently docile. No major improvement has been noticed in the demand though the supply side continues to apply the pressure on the prices. Since election of Donald Trump super enthusiastic approach to US infrastructural and a wider positive attitude for risky assets has gone a bit too far pushing up the copper prices which has risen by about 15 per cent he pledged to increase spending on infrastructure in the last quarter of 2016, but since then lack of major thrust on the demand has failed to sustain the upsurge. The other economic activity in the global economies has also failed to support the copper prices. The major economic factors affecting the copper prices are movement in the Dollar index against other currencies, PMI data of China, US, Europe and Latin American countries. 

The market is still being pressured by abundance of supplies and lagging demand. World mine production is estimated to have increased by around 5 per cent (900,000 t) in the first eleven months of 2016 with concentrate production increasing by 7 per cent and solvent extraction-electro-winning (SX-EW) declining by 2 per cent. The increase in world mine production was mainly due to a 41 per cent (630,000 t Cu) rise in Peruvian concentrate output that is benefitting from new and expanded capacity brought on stream in the last two years. A recovery in production levels in Canada, Indonesia and the United States, and expanded capacity in Mexico, also contributed to world mine production growth. However overall growth was partially offset by a 4.3 per cent decline in production in Chile, the world’s biggest copper mine producer, and a 5.5 per cent decline in DRC where output is being constrained by temporary production cuts. On a regional basis, production rose by 6 per cent in the Americas and 10.5 per cent in Asia but decline d by 4 per cent in Africa while remaining essentially unchanged in Europe and Oceania. World refined production is estimated to have increased by about 2.5 per cent (500,000 t) in the first eleven months of 2016 with primary production (including Electro-winning) increasing by 3 per cent and secondary production (from scrap) declining by 1.5 per cent: The main contributor to growth was China (increase of 6 per cent), followed by the United States w here production increased by 10 per cent and Mexico (16 per cent) where expanded SX- EW capacity is contributing to refined production growth. Output in Chile and Japan, the second and third leading refined copper producers, declined by around 2 per cent and increased by about 5 per cent respectively. Production in the DRC and Zambia declined by an aggregated 12 per cent mainly due to the impact of temporary production cuts. On a regional basis, refined output is estimated to have increased in the Americas (2 per cent) and Asia (6 per cent) while declining in Africa (12 per cent) and in Europe (including Russia) (3 per cent) and remaining essentially unchanged in Oceania. 

The global miner BHP Billiton reported it’s planned to halt production at the Escondida mine in Chile (which holds a 57.5 per cent position) due to a workers strike since February. A strike at the world’s largest copper mine faces a critical phase this week as the union expects management to tempt workers with an offer that could end the stoppage in northern Chile. After 30 days of strike, on March 10, BHP Billiton Ltd.’s Escondida can legally make individual offers to workers. If it manages to convince more than half of the workforce, the union will have to concede defeat and end to the strike. On 6th March 2017, the strike at Escondida overtook the 25-day stoppage at the same mine in 2006, which at the time was the longest strike in at least a decade among Chile’s major copper mines. Other mine operators in Chile are watching the Escondida dispute closely as it is expected to set the tone for upcoming negotiations this year. If enough workers do yield, the union is ready to resort to an article of the existing labor code that allows workers to extend their expired contract for 18 months, negotiations would then resume under Chile’s new labor rules, which kick in on April 1 and guarantee existing benefits, which is one of the major sticking points in the dispute. This current disruption of production in Escondida is likely to support the prices in the coming days. Apart from Escondida, Issues in relation to export permits for copper mining in Indonesia further strained world supplies of copper. Freeport-McMoRan, the Phoenix-based mining company operating the Grasberg mine in Indonesia, is facing trouble in exporting copper out of the country due to a ban on ore concentrate exports imposed by the Indonesian government in January 2017.

World apparent refined usage is estimated to have increased by around 2 per cent (475,000 t) in the first eleven months of 2016. Growth mainly due to an increase in Chinese apparent demand as world usage excluding China remained essentially unchanged. Chinese apparent demand (excluding changes in unreported stocks) increased by around 3. 5 per cent based mainly on 6 per cent growth in refined production as in fact net imports of refined copper declined by 6 per cent. Net refined copper imports have been on a declining trend in 2016 with the monthly average in Jul-Nov 36 per cent below that of the 1st half of the year. Monthly average Chinese apparent demand in Jul-Nov 2016 is 7 per cent below that in the first half of the year. Usage in the United States and Japan, the second and third leading refined copper using countries, is down by 2 per cent and 3 per cent respectively. On a regional basis, usage is estimated to have increased by 3.5 per cent in Asia (when excluding China, Asia usage increased by 3 per cent) and by 2 per cent in Europe (by 1.5 per cent in the EU), while declining by 3 per cent in the Americas.

Copper supply set to under-perform demand for much of the next half decade. As the global economy departs from several years of stagnation, so too does the outlook for copper pricing. The combination of stronger than expected Chinese demand, a clear lack of visible copper inventory build, an end to cost deflation, and the U.S.-centric reflation story after the Trump election victory sparked positive price momentum through the latter stages of 2016. On the demand side, there's now little to worry about, since the dramatic crunch in capital expenditure cuts since an extended broad-based commodities slump hit the market in the summer of 2014. In 2016, China's real copper consumption likely rose by 5.7 per cent and for the last phase of the current decade is projected to be in the range of 3 to 7 per cent. 

Long term investment sentiment still remains intact as the reports of supply disruptions and improving global economic scenarios.

Thursday, 9 February 2017

Copper Likely to Consolidate Further after Steep Rally

The financial health of the global economies is being reflected in the copper prices. It made a sharp rally in the last two to three months and at present is searching for support as the bullish sentiments are losing steam and are paving way for consolidation. The rating of the copper industry by various rating agencies also played a crucial role in deciding the direction of the market. Last year, Moody's embarked on a sector-wide review of the 87 global mining majors that it covers, eventually downgrading 36 companies, including marquee names like Rio Tinto, BHP Billiton, Freeport-McMoRan and Chile's state-owned Codelco. The likes of Anglo American and Vale also lost their investment grade rating for the first time leading to large scale production cuts, adding partial support to the copper market. At the same time simultaneously, the global economy was facing the major economic slowdown the entire industry contracted and it led to crash in demand for copper which eventually led in the state of surplus adding increased bearishness in the copper prices. But, towards the end of 2016, from the month of 0ctober the scenario began to change with added stimulus being provided by the projection of high industrial demand from China and positive economic data flowing in from major global economies. At present, the copper market is on lookout for sustained support from the end using industry to sustain the prices. 

The supply of copper in the world market continues to be on the surplus side putting pressure on the prices. World mine production is estimated to have increased by around 5 per cent (815,000 t) in the first ten months of 2016 with concentrate production increasing by 7 per cent and solvent extraction-electro-winning (SX-EW) declining by 1.5 per cent. The increase in world mine production was mainly due to a 43 per cent (590,000 t) 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, Indonesia and the United States, and expanded capacity in Mexico, also contributed to world mine production growth. However overall growth was partially offset by a 4.5 per cent decline in production in Chile, the world’s biggest copper mine producer, and a 6 per cent decline in DRC where output is being constrained by temporary production cuts. On a regional basis, production rose by 6 per cent in the Americas and 10 per cent in Asia but declined by 4 per cent in Africa while remaining essentially unchanged in Europe and Oceania World refined production is estimated to have increased by about 3 per cent (540,000 t) in the first ten months of 2016 with primary production (including Electro-winning increasing by 2.5 per cent and secondary production (from scrap) by 6 per cent. The main contributor to growth was China (increase of 7 per cent), followed by the United States where production increased by 12 per cent and Mexico (18 per cent) where expanded SX-EW capacity is contributing to refined production growth. Output in Chile and Japan, the second and third leading refined copper producers, declined by around 1 per cent and increased by about 4 per cent respectively. Production in the DRC and Zambia declined by an aggregated 13 per cent mainly due to the impact of temporary production cuts.

On the demand side there has been increase in few countries. World apparent refined usage is estimated to have increased by around 3 per cent (515,000 t) in the first ten months of 2016. Growth mainly due to increase in Chinese apparent demand as world usage excluding China remained essentially unchanged. Chinese apparent demand (excluding changes in unreported stocks) increased by around 5 per cent based mainly on 7 per cent growth in refined production as in fact net imports of refined copper declined by 4 per cent. Net refined copper imports have been on a declining trend in 2016 with the monthly average in the third quarter 40 per cent below that of the 1st half. Monthly average Chinese apparent demand in the 3rd quarter 2016 is 5 per cent below that in the first half. Usage in the United States and Japan, the second and third leading refined copper using countries, is down by 4 per cent and 3 per cent respectively.

As per the latest Moody’s report on the global base metal sector, the industry has witnessed a starkly different picture, with higher metal prices and, for the most part, stronger company balance sheets, better liquidity, and better debt-maturity profiles, which is expected to provide more support to the industry. After the US prudential election results, the things have changed on the positive side with US going for more infrastructural expansion. The other major driver of the rally in base metals and positive investor sentiment towards mining came on the back of improving data from China that largely reflects stimulus spending by the Beijing government last year. Moody’s upward revision of Chinese GDP expansion to 6.6% and 6.3% in 2016 and 2017 respectively from 6.3% and 6.1% before is also likely to provide support to the copper prices. 

The recent Development in the market suggests that the market is likely to consolidate for a longer period than expected and then make a slight downside movement. Any negative effects on commodities from Trump’s victory effect would only exist in the medium term. The US dollar has rolled back all gains from Trump’s winning presidential election, and appears to have been oversold and this has weakened the investor’s risk appetite and propelled them towards risk aversion. But commodities did not erase all gains from previous expectations of infrastructure construction pushed by Trump as the US dollar fell. After slump in domestic bond market, the People’s Bank of China (PBOC) conducted continuous and small currency injection through open market operation so as to ease year-end cash tightness, improving the market. Nonetheless, with curb in asset price bubble, China’s monetary policy is likely to tighten in the future leading to shrinking of industrial demand. 

On the fundamental side of the supply & demand, there is no major reversal in the scenario with inventories both in China and abroad growing continuously. The proportion of canceled warrants decreased, and spot prices remained below futures prices. The producers are not building stocks actively during low-demand season. The Baltic Dry Index (BDI) which mostly moves in line with metals is falling continuously indicating marginal bearishness existing in the market. The latest rebound in copper prices was due mainly to capital inflows. Commodity markets are witnessing net capital outflows this week after two weeks of growth, meaning shorts leaving are the market after profit-taking. CFTC speculative funds still hold high net longs, reflecting overbought. Net longs increased for the first time in last four weeks. Thus, one can conclude that all is not yet over as per as the businesses in the copper prices are concerned, but one must be cautious if investing for short term gains. Long term investment sentiments are still safe and sound.

Tuesday, 31 January 2017

Commodity Options in Indian Market Scenario

Currently in Indian market, the futures trade has been functioning successfully for the last 14 years. It has been increasingly supported by the participation of traders and merchants and few of the large and medium farmers. Involvement of small and marginal farmers, who comprises of about 78 per cent of the farming community, is still not so acclimatized with the futures trading. Still a lot of effort is needed in this direction. With every passage of time the commodity futures trade have evolved with increased strength and transparency.
The introduction of commodity options trade as a new instrument is likely to enhance the participation base as it requires lesser exposure capital thereby reducing the enormity of loss. In simple terms, in a futures contract, both participants in the contract are obliged to buy (or sell) the underlying asset at the specified price on settlement day. As a result, both buyers and sellers of futures contracts face the same amount of risk. On the other hand, the option contract buyer has the right but not the obligation to buy (or sell) the underlying asset. Hence the term "option" and this option come at a price in the form of a premium (more specifically, the time value of the premium). With this "option", the option buyer's risk is limited to the premium paid but his potential profit is unlimited. Sellers of options take on an additional volatility risk in exchange for the premium. However, their potential profit is then capped while their potential losses have no limit. Hence, this premium can be high if the underlying asset is perceived to be very volatile. The other major difference is that Options can be exercised at any time before they expire while a futures contract only allows the trading of the underlying asset on the date specified in the contract. In futures, the performance of the contract is done only at the future specified date, but in the case of options, the performance of the contract can be done at any time before the expiry of the agreed date. Apart from the commission paid, futures do not require advance payment, but options require the payment of premium. In futures, a person can earn/incur an unlimited amount of profit or loss, whereas in options the profits are unlimited, but the losses are up to a certain level.
The very motive of starting the Commodity futures was to facilitate efficient price risk management and price discovery in a fair, transparent and orderly manner. The futures market was to help Indian farmers to hedge their produce against potential risks arising out of price movements in spot markets so that they can get guaranteed price for their produce in the future. But, in spite of 14 years of futures trading through Commodity Exchanges, majority of the farming community is till away from participating on the platform either due to lack of awareness or due to complexity of the trading process. Currently, the futures markets continue to be dominated by speculators and non-commercial players who frequently indulge in price rigging and other market abusive practices with impunity.
I feel that the desired penetration level has not been achieved owing to lack of liquidity and existence of fear factor in the minds of small and marginal farmers who are still depended on the whole sellers and local aggregators. According to market estimates, not even 2000 farmers in India are directly trading on commodity futures exchanges. Even the participation of farmers marketing cooperative bodies (such as NAFED, HAFED and Farmers Producers Group) is very limited due to lack of adequate knowledge of the functioning of futures market. Such bodies can act as aggregators and hedge positions in futures exchanges on the behalf of their farmers. Thus with such level of penetration in the market, we can apprehend that futures have failed to achieve their avowed objectives of price discovery and price risk management especially for small and marginal farmers (owning less than 2 hectares of land).     
In the Indian Scenario where an average Indian farmer lacks a basic understanding of what is involved in futures trading. The options trading are even more difficult to comprehend as it adds yet another layer of complexity on what is already a very complex trading instrument. In the same vein, small enterprises lack the resources and capacities to trade actively in derivatives contracts for hedging purposes. Even experienced traders struggle to understand the risks involved in trading both futures and options contracts. Moreover the bulk of trading in the Indian commodity futures market is carried out by speculators and non-commercial traders who attempt to profit from buying and selling futures contracts by anticipating future price movements but have no intention of actually owning the physical commodity, while the participation of hedgers is almost negligible. Time to time the commodity exchanges are conducting short duration training workshops for small stakeholders but such workshops are inadequate to impart information and insights on the complexities of derivatives trading.
Having said all about the complexity of the futures and options trade, the introduction of Option in the Commodities trade is still a very welcome step, but the quantum of challenges to implement it is enormous. The major challenges could be enlisted as:
·         Lack of awareness about the options
·         Majority of actual participants (Farmers, Producer’s Organization, Government entities & banks) are still not clear on the process of how it could be applied on the agricultural products.
·          Liquidity is still lacking in most of the agricultural products being traded on exchanges
·          Fragmented nature of spot market
·         Over-politicization of state agricultural produces marketing committees (APMCs) and state agricultural produces marketing boards (APMBs)
·         inadequate warehouses, storage and grading facilities
·         poor condition of roads and other infrastructure in the rural India
If these challenges are met, option trading in Commodity market for India is bound to make remarkable changes in the Indian Agriculture System. 

Wednesday, 11 January 2017

Copper Finding Sustained Support from Rising Strength in Global Economies

From the last couple of quarters, copper prices have been find increased support from the improving economic scenario in major economies and declining supplies from major producing countries. The US election results has infused strength in the global economies and provided further strength to dollar pushing the copper prices on the higher levels. The strength in the copper is coming from the continued reduction in supplies, improved demand from China, improving economic scenario in China and rising dollar strength. 

On the supply side the market continues to be in deficit. According to preliminary ICSG data, the refined copper market for September 2016 (excluding the adjustment for changes in China’s bonded stocks) showed an apparent production deficit of around 15,000 MT. World mine production is estimated to have increased by around 6% (820,000 MT) in the first nine 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 44 per cent (+530,000 MT) 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, Indonesia and the United States, and expanded capacity in Mexico, 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 being constrained by temporary production cuts. The average world mine capacity utilization rate for the first nine months of 2016 increased to 86 per cent from 85 per cent in the same period of 2015. World refined production is estimated to have increased by about 3 per cent (510,000 MT) in the first nine 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 13 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 third leading refined copper producers increased by around 1 per cent and 3 per cent respectively. Refined production in the DRC and Zambia declined due to the impact of temporary production cuts. Based on the average of stock estimates provided by independent consultants, China’s bonded stocks increased by around 70,000 MT in the first nine months of 2016 from the year-end 2015 level. Stocks decreased by around 130,000 MT in the same period of 2015. In the first nine months of 2016. 

Mining disruption in major mines is supporting the copper prices. Workers at the giant Escondida copper mine in northern Chile, the world's largest, have rejected an opening pay offer as insufficient as the two sides prepare for the start of a new collective wage agreement. The BHP Billiton-controlled operation produced 1.153 million MT of copper in 2015; however, production fell by almost 20 per cent last year as the mine worked through lower grade ores. The company posted a 43 per cent drop in profits for the first nine months of 2016, reflecting the lower production and copper price in the period.

World apparent refined usage is estimated to have increased by around 3 per cent (565,000 MT) compared with that in the same period of 2015 mainly due to Chinese apparent demand as world usage excluding China remained essentially unchanged. Chinese apparent demand increased by around 7 per cent in the first nine months of 2016 based on a 2 per cent increase in net imports of refined copper and 7 per cent growth in refined production. However, net refined copper imports have been on a declining trend in 2016 with the monthly average in the third quarter 40 per cent below that of the 1st half. Monthly average Chinese apparent demand in the 3rd quarter 2016 is 5 per cent below that in the first half. In the first nine months of 2016 aggregated usage in the EU, Japan and the United States is down by 0.6 per cent. 

Nine large Chinese copper producers reduced production by close to 5 per cent more than 200K MT. Mining disruption in major mines is supporting the copper prices. Workers at the giant Escondida copper mine in northern Chile, the world's largest, have rejected an opening pay offer as insufficient as the two sides prepare for the start of a new collective wage agreement. The BHP Billiton-controlled operation produced 1.153 million MT of copper in 2015; however, production fell by almost 20 per cent last year as the mine worked through lower grade ores. The company posted a 43 per cent drop in profits for the first nine months of 2016, reflecting the lower production and copper price in the period. 

The development of China – US relationship is also going to have significant impact on the copper market. A huge amount of copper in China is believed to be tied to carry trades. In a typical carry trade, importers in China open an LC (letter of credit) with foreign banks by paying a portion of the total import costs. Chinese importers then sell the copper and get cash. The typical payment time for an LC is three to six months. In this way, Chinese importers get access to cheap US dollar funds. The basic premise behind these deals is the arbitrage between interest rates in China and the developed world. As the differential between US and Chinese interest rates is expected to narrow following the rate hike, we could see some unwinding in copper carry trades. This could impact copper’s financial demand. The rate hike could also have some impact on US real copper demand. Copper serves as a raw material for various industries. The construction and transportation sectors are among the major copper consumers. One of the factors driving higher car and home sales has been lower mortgage rates. Now, with the Federal Reserve embarking on a tightening path, the housing and automotive sectors could see some repercussions. To be sure, it’s not going to be an overnight impact. However, higher rates could certainly have some impact in the medium-to-long-term. 

The price trends for copper for the past two years have been bearish, but the rally in prices started in copper after winning of Donald Trump in the US presidential election. The rally has been partly based on speculation regarding the impact of the President-elect’s $500 billion infrastructure plans on demand for the metal. It has also been fuelled by a pick-up in Chinese imports, responsible for almost 50% of global copper demand, which is seen a good omen for the industry’s health. The copper concentrate imports into China have risen sharply as smelters there have taken advantage of an increase in the fees they charge to turn concentrates into metal. But as they've boosted production, the glut in concentrates has slowly fed through into the refined market, putting pressure on local premiums for copper cathode and causing imports of finished metal to get slower. The investment bank now believes that increased demand from China will leave the market tighter than previously expected, which will support a more "bullish" environment for the metal at least to mid-2017. Moreover, the slowing supply growth outlook primarily to production cuts in China, the world’s top consumer, and declining ore grades in Chile, the world’s largest producer of the red metal is also likely to provide more support to the copper market.

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