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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.

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