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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.

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