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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.

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