Weaker demand from China has caused copper prices to fall to levels not seen since 2009, and mining groups are feeling the pain as signs of recovery have almost disappeared from any near vicinity. There is currently a strong feeling that the story of 2009 (year of great financial crises), might be repeated in case of mining industry as in most of the commodities, the prices are falling and assumptions for demand, investment, jobs and shareholders’ dividends are being ripped up on sustained basis.
Emerging markets are usually fuelled by manufacturing growth, with high demand for energy and materials giving them a strong correlation with commodity prices. This relationship can be seen more clearly if we track commodity performance alongside the economic slowdown we’ve seen in China over the past several years. After more than a decade of outstanding double digit GDP growth figures, China has finally begun the long wind-down from those unsustainable highs to settle into a more stable and conservative growth rate. The collapse of the 2002-2012 commodities “super cycle” appears to be highly correlated with slowing Chinese demand. During the period, China experienced annual GDP growth that averaged 10.6 per cent and became a major importer of commodities which helped drive prices higher. But, ever since the slow down commenced the fall in the copper prices have gained pace and dropped over 50 per cent.
Copper is one of the most economically sensitive commodities. Copper has declined quickly, sinking under six-year lows and reflecting the panic recently seen in the Chinese stock market. If we look at Peru, a country where copper accounts for 20 per cent of its total exports, we can see the rise and fall of copper. During the super cycle, copper was in high demand by China and other emerging economies and Peru experienced growth in excess of 7 per cent. However, since 2013, Peru’s annual GDP growth has fallen from 7 per cent to just 1 per cent currently. Thus, it’s a sobering reality that China’s economic boom was the primary supporter of copper prices. Thanks to years of high demand, copper producers ramped up output, which has now created a supply glut, just as China’s copper demand wanes.
Looking after the developments in the Chinese economy, one can say that the problem of plentiful supply of copper is not going to be a temporary phase for the global industry. First, Beijing knows that huge infrastructure spending, as a proportion of GDP, is unsustainable. The authorities are trying to encourage consumption by consumers instead. Second, China, overburdened with debt, can’t afford a repeat anyway. The other difference from 2009 is more encouraging for the producers. Balance sheets are stronger and most mining companies, instead of placing blind faith in “stronger for longer” commodities Super Cycle, have been talking the language of production efficiency and investment discipline.
The recent development in the Chinese economy continues to rattle the copper investor giving its price a steep falling experience. Copper's latest drop follows a reading of Chinese manufacturing activity that shocked the market. The copper price is down 17 per cent so far this year. The Caixin manufacturing purchasing managers' index (PMI) for July fell by more than expected to a two year low of 47.8. A reading below 50 indicates a contraction and the Caixin index has shown shrinking output, orders and prices for five straight months. China, the world's second largest economy, is responsible for 45 per cent of total global copper demand of some 22 million MT and the country's PMI data is particularly closely correlated to the copper price as the graph shows. The weak readings partly reflect temporary disruptions to factory activity as a result of a number of tropical storms that hit China’s key manufacturing hubs over the past month. In addition, recent stock market volatility probably hurt business sentiment and led firms to provide more downbeat responses to the latest PMI surveys.
Apart from the Chinese economic slowdown news, global demand supply situation, economic development in US, Europe and other economic issues have also affected the copper prices.
The global supply side of the copper market continues to be firm and the market continues to be surplus on the supply front. World mine production is estimated to have increased by around 3 per cent (175,000 MT) in the first four months of 2015 compared with production in the same period of 2014. Concentrate production increased by 3 per cent while solvent extraction-electrowinning (SX-EW) increased by 3.5 per cent. The increase in world mine production was mainly due to a recovery in production levels at mines in Indonesia and Chile, although the latter also benefited from production at mines that started last year. Production in Peru increased by 4 per cent and in the United States production declined by 6 per cent. World refined production is estimated to have increased by around 3 per cent (210,000 MT) in the first four months of 2015 compared with refined production in the same period of 2014: primary production was up by 2 per cent and secondary production (from scrap) was up by 8.5 per cent. The main contributor to growth was China (up by 6 per cent), followed by the Philippines and Indonesia where production was reduced in the first quarter of last year due to operational constraints. Production also increased in the DRC (+14 per cent). Output in Chile, Japan and the United States (the second, third and fourth leading refined copper producers) each declined by around 4 per cent.
On the demand side, in the first four months of 2015, world apparent usage is estimated to have declined by around 4 per cent (290,000 MT) compared with that in the same period of 2014. Chinese apparent demand declined by 5 per cent (165,000 MT) based on a 14 per cent decrease in net imports of refined copper from the high net import level in early 2014 and consequently higher apparent usage. Excluding China, world usage has declined by around 3 per cent in the first four months of 2015 mainly due to a decline of 43 per cent in Russia’s apparent usage (following the withdrawal of Russia’s cathode export tax in September 2014) and a decline of 6 per cent and 7 per cent in Japan and the EU, respectively.
Copper has shed about a fifth of its value over the past three months. The metal is currently trading lower than supply/demand fundamentals would warrant in spite of the few supporting news as reports of many mine disruptions, strike at a Codelco mine in Chile, power shortages shutting down Zambia’s largest copper mine, and partial resolving of the Greece crisis. Such positive news for the market has been greatly negated by the firmer dollar that has restricted the recovery in the metal prices.
The strong U.S. dollar / weak producer currency environment continues to weigh on the industrial metal complex, but we are starting to see some signs of a producer response, but most markets have not yet reached a critical mass of closures. Thus we feel that till the Chinese government desires to implement financial and structural reforms to boost long-term growth the metal market would continue to trade in the Red Zone with further unexpected falls.
