Copper prices follow the natural flow of industrial demand, responding
to long-term growth and contraction cycles, as well as fluctuations in mining
production. World financial markets understand its power to predict economic
turning points. Copper affects nearly every aspect of industrial production as
an integral component in building construction, power generation and
transmission, electronic products, industrial machinery and transportation. The
supply continues to be robust and on the positive side since it entered on the
surplus side mid of 2015.
Rapid growth in BRIC nations in the last decade underpinned copper
prices, with China leading the way, building new cities in the middle of
agricultural land while engaging in massive renovation projects throughout
older cities. The country’s annual GDP growth rate hit a peak at 14 per cent in
2007, dropped to 9.2 per cent in 2009 and rose to 10.4 per cent in 2010. By the
end of 2010, analysts were convinced that China and BRIC nations’ rapid growth
would continue for another decade. However, that year marked a cyclical peak,
with growth falling at a steady pace into the second half of 2015 when it hit
6.9 per cent. Copper took notice of this sea change early, printing the 2011
high and turning sharply lower in a new downtrend that’s still in progress. It
crossed the last support level above the 2008 bear market low in the fourth
quarter of 2015, setting up a major test.
Rising copper prices reflect increasing economic growth, with countries
building infrastructure at a rapid pace to meet the demand for new factories,
commercial facilities, and residences. Falling copper prices signal slowing
economic growth or recessionary conditions, with commercial and industrial
occupancy levels falling because supply exceeds demand. Since China utilizes
over 45 per cent of the total copper production, the state of its economy is
the guiding force for the copper. Over the last one and half year, the slowdown
in the Chinese GDP growth, weakness in its PMI Data and weak demand for copper
has led to the massive fall in prices (breaking the lower levels of 8 -9 years
in different regions). This has also severely affected the economies of the
copper mining countries and led to significant production cuts by major mines.
Since the start of 2016 the prices have shown some stability on presumption of
global economic stability.
In the current scenario, China’s growth is expected to stabilize in 2016
at the same time the United States continues its slow but steady economic
expansion. The introduction of Federal Reserve rate hikes could jeopardize U.S.
growth, but prior history suggests it will be several years before the economy
turns into the next recessionary cycle. Europe becomes the wild card in this
scenario, with dovish central bank policies attempting to jumpstart Eurozone
economies. Their efforts may be working, with growth hitting a four-year high
in the fourth quarter of 2015. China has accumulated most of the world’s copper
stocks, with miners and investors trying to figure out what that means for
future demand. China, which consumes more than 40 per cent of global copper,
now accounts for almost 80 per cent of stockpiles after booming imports late
last year sucked up stocks held elsewhere. The bears are currently having a
tighter grip on the copper market and opine that the stockpile reflects the demand
weakness as China transitions to a consumer-driven economy. The others are of
the opinion that the stockpile is not necessarily a bad thing, and shows the
Chinese state is buying and holding copper for strategic reasons.
Copper lost a quarter of its value last year as slowing demand in the
Asian nation exacerbated a glut after years of over-investment by miners. While
copper has rebounded from January’s six-year low, it’s more than 50 percent
lower than at the height of the commodities boom in February 2011. Demand in
China needs a marked pickup in the next few months to support prices. While
copper held in warehouses monitored by the Shanghai Futures Exchange fell in
the past two weeks, it has more than doubled this year to a record high last
month. Metal held in China’s bonded warehouses, which isn’t monitored and is
custom-free, has expanded to a seven-month high amid oversupply, according data
compiled by Bloomberg Intelligence.
Apart for the recent economic development the supply dynamics needs to
be studied in details. As per the study, World mine production is estimated to
have increased by around 2 per cent (30,000 MT) in January 2016 compared with
production in January 2015. Concentrate production increased by 2.5 per cent
while solvent extraction-electrowinning (SX-EW) remained essentially unchanged.
The increase in world mine production was mainly due to a recovery in
production levels in Indonesia and in Peru while the latter also benefited from
new production at mines that started last year. Production declined by 11 per
cent in Chile, the world biggest copper mine producer. World refined
production is estimated to have increased by around 7 per cent (130,000 MT) in
January 2016 compared with refined production in the same month of 2015:
primary production was up by 7 per cent and secondary production (from scrap)
was up by 6 per cent. The main contributor to growth was China (+14 per cent),
followed by the United States where production increased by 30 per cent. Output
in Chile, the second leading refined copper producer, increased by 4.5 per cent.
On a regional basis, refined output in January is estimated to have increased
in the Americas (10 per cent), Asia (10 per cent) and Oceania (20 per cent)
while declining in Africa (-12 per cent) and remaining unchanged in Europe. The
average world refinery capacity utilization rate for January 2016 increased to
85 per cent from 81 per cent in January 2015.
The refined copper market balance for January 2016 showed an apparent
production surplus of 56,000 MT. When making seasonal adjustments for world
refined production and usage, January showed a production surplus of 50,000 MT.
This compares with a production surplus of 15,000 MT (a seasonally adjusted
surplus of 9,000 MT) in January 2015.
One point needed to be highlighted that the Chinese has been benefiting
from the slump in the global copper prices. The country is the largest copper
importer. So, lower copper prices bode well for China. However, lower copper
prices would also mean that China mines less copper domestically and relies
more on imports—both refined and concentrates. China lacks secondary copper
reserves. It would make sense for the country to import more copper instead of
producing it domestically when copper prices are trading at multiyear lows.
This would mean that Chinese copper imports might not fall much despite the
demand slowdown in the country. Another issue that could hit copper prices in
the medium term is the copper stacked in financing deals. A lot of metal is
tied in these deals. It could return to the physical market if we see rate
hikes by the Fed. The successive rate cuts by the Chinese Central Bank already
reduced the arbitrage opportunities in these transactions.
Thus, all is not so negative with the investment sentiments in the
copper industry. Slight stability in the global economy would bring back the
prices on track. New investors in the copper industry should now be keenly
watching the movement in the FED Interest Rates and the Chinese industrial
growth index for further direction and for those who have already invested
should stay invested and have patience as the low phase of the industry is
supposed to be over.
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