All
commodities move in response to supply/demand fundamentals: real and perceived.
To analyze any commodity you need to look at what makes up physical vs.
investment demand for the metal (in terms of proportions) and what drives each
holders. Copper is interesting because
physical and investment buyers both account for significant proportions of
physical copper demand. It's hard to overstate the importance of copper prices,
both to numerous industries as well as the global economy. In the U.S., demand
for products made of copper, 60 percent of which is used to make wire, comes
primarily from four sectors. One is construction. A second source of copper
demand comes from utilities and companies that own and operate the vast
transcontinental high-power lines that crisscross the nation and constitute the
bulk power grid. A third source of copper demand is manufacturers of electronic
products like smart phones and electronic industry. A fourth industry that buys
large amounts of copper products is the car and truck industry. The average
automobile, for example, contains nearly one mile of copper wiring, while the
total weight of copper in cars ranges from 50 pounds for compacts to as much as
100 pounds for luxury and hybrid cars.
Demand
Prospects
The
Chinese demand has always been the mover and trend setter for the copper
prices. The State Grid Corporation of China (SGCC), which provides power to 80
percent of the world’s second-largest economy aims to boost by 13 percent its
annual investment to more than $60 billion. Given that Chinese utilities
account for more than 40 percent of Chinese copper demand, that sort of big
jump in capital investment should firm up prices.
China
is not the only source of expected rising copper demand. The worldwide demand
for the red metal has rose throughout 2013. The trends in global refined copper
consumption are also progressing to an alarming state. Industrial production is
not keeping up with copper consumption and recent indications have pointed to
estimates in Chinese consumption to be very conservative. It now appears that
in the next 25 years, the world will need to produce as much copper as has been
produced in the history of humanity.
India
also provides a very compelling case for copper demand and one only has to look
as far as their power needs. According to the International Energy Agency,
India's power production needs to rise by 15-20% annually and to meet that,
India needs to invest $1.25 trillion by 2030 into energy infrastructure. From
this new infrastructure, India's annual copper demand is expected to more than
double.
There
are three major regions that copper investors should focus on in terms of
assessing copper demand: the BRIC countries, the U.S. and The Euro Zone. A savvy copper investor will follow the economic
developments in those regions for clues into what the future demand for copper
looks like.
Supply
Growth & Major Hindrances
Strikes,
storms and scheduled maintenance of major copper processing facilities are
flattening the growth in copper production. The rate at which global copper
supplies are growing will peak this year and then begin to slow next year.
Chile -- Output at Codelco’s 300,000 ton
per year Chuquicamata smelter was halted for most of December due to a strike.
Philippines -- Glencore’s Pasar
smelter in the Philippines remains closed since Typhoon Haiyan slammed into the
country on November 7, 2013.
Australia -- BHP Billiton plans a maintenance
outage at its Olympic Dam smelter in March.
Indonesia -- Freeport-McMoRan has suspended
copper concentrate exports from its huge Grasberg mine in Papua as it fights a
sudden 25 per cent export duty that will grow to 60 per cent by 2016 on copper
concentrate exports. That led Deutsche Bank to cut its 2014 copper sales
estimates by 120 million pounds, assuming a full first-quarter of export
disruptions.
Status
on global Inventory
In
addition to higher demand and production constraints, the global stocks of
already-mined copper are tightening. A year ago, copper stocks were about 1.46
million tons. That rose to 1.81 million tons in April of last year and has been
falling ever since. By December 2013 global copper stocks had declined to an
estimated 1.27 million tons. Further, the metal’s on-warrant inventory has
shrunk to its lowest level since 2008. Copper inventories in China, meanwhile,
have dropped and stocks at Shanghai Futures Exchange warehouses have also
dropped. From where we stand at Metal Miner, whether an uptick in Chinese
demand will lift global copper markets remains unclear, but some perceive
copper may have hit its floor.
Price
Outlook
The current
prices of copper are driven by excellent fundamentals. Strong demand growth
driven by China and global infrastructure/urbanization - underpinned by a wide
range of uses. China has little domestic resource and is unable to use its
industrial advantages to create supply (unlike aluminum, zinc, coal, iron-ore). Copper
industry has failed to deliver sufficient supply growth despite record high
prices – prices have had to raise high enough to generate enough scrap to
balance the market. Copper demand in China has at least 80% growth left to
reach developed world averages and can single handedly support double-digit
growth for many years. The other major factor supporting the price is shift in
the standard of living in the emerging markets. China is the top consumer of
copper in the world, and a major consumer of all commodities. Another reason is
the current fundamental which is driving copper growth demand, a trend that
extends beyond China and into the emerging markets. Despite the recession,
globally right now we are witnessing an unprecedented growth of moving people
from rural to urban dwellings. Humans that live in rural settings existence
require virtually no copper, but in an urban setting AC’s, electricity, cars
etc. – all require copper. Now in countries such as China and India, that have
huge populations, this movement means a lot of copper is required.
