Increased Chinese Support Sustained Northward Surge in Copper Prices

The copper market scenario has been improving in the last couple of month owing to the improvement in the Chinese demand though the supply of copper continues to be on the surplus side. The prices have also found support from the series of supply disruptions at major mines. The changes in the global economic scenario and more impetus on the growth have also adequately supported the price rally in copper. The trend has been positive but it’s too early to assume that the market has overall entered the bull phase.

On the supply front, World mine production is estimated to have increased by around 5.8 per cent (730,000 MT) in the first eight months of 2016 compared with production in the same period of 2015. Concentrate production increased by 7.5 per cent while solvent extraction-electro-winning (SX-EW) declined by 0.5 per cent. The increase in world mine production was mainly due to a 45 per cent rise in Peruvian output that is benefitting from new and expanded capacity brought on stream in the last two years. A recovery in production levels in Canada and the United States, expanded capacity in Mexico and a ramp-up in production in Mongolia, also contributed to world growth. However overall growth was partially offset by a 4 per cent decline in production in Chile, the world’s biggest copper mine producer, and a 7 per cent decline in DRC where output is constrained by temporary production cuts. The average world mine capacity utilization rate for the first eight months of 2016 increased to 85 per cent from 84 per cent in the same period of 2015. World refined production is estimated to have increased by about 3.1 per cent (470,000 MT) in the first eight months of 2016 compared with refined production in the same period of 2015: primary production was up by 2.5 per cent and secondary production (from scrap) was up by 5.5 per cent. The main contributor to growth was China (+7 per cent), followed by the United States where production increased by 14 per cent and Mexico (+19 per cent) where expanded SX-EW capacity is contributing to refined production growth. Output in Chile and Japan the second and the third leading refined copper producers increased by around 2 per cent and 3 per cent respectively. Refined production in the DRC and Zambia declined due to the impact of temporary production cuts. The average world refinery capacity utilization rate for the first eight months of 2016 remains practically unchanged from that in the same period of 2015 at around 83 per cent.

During the same period, world apparent refined usage is estimated to have increased by around 3.8 per cent (570,000 MT) compared with that in the same period of 2015 mainly due to increases in China. Chinese apparent demand increased by around 7.5 per cent compared with the same period of 2015 based on an 8 per cent increase in net imports of refined copper. However July and August net refined copper imports at 176,000 MT and 175,000 MT respectively were the lowest since April 2013 and compares to a net monthly imports average of 312,000 MT in the first half of 2016. Aggregated usage in the EU, Japan and the United States remained essentially unchanged.

Global copper consumption is recovering as well, led by China. China’s refined copper consumption will probably rise by around 7 per cent this year led by strong demand for power cable, high performance sheet and strip for the auto and computer appliance sectors, by a recovery in magnet wire demand, and general demand as the economy recovers. China’s infrastructure spending is and will continue to be a multiple of whatever the US’s will be under its new president. For instance, in the first 10 months of this year, China’s spending on infrastructure alone was $1.4tn and it will probably spend as much if not more in the next 10 years as in the last since government plans to migrate another 200m from the rural areas to the urban world, making a migration of some 400 million over 20 years.

The global demand of copper has expanded by about 1per cent by December 1^st 2016 and is been adequately supported by the positive growth figures from E7 and G7 monetary data. Global policy has shifted from focusing on austerity to one of inflating the global system. What is missing from most equations is that when this shift starts, inventory moves out of the raw material chain into refilling the massive global manufacturing chain from the final product, such as a transformer or an aircon, all the way through the individual sectors to the semi-fabricator, which of course has been emptied in recent years. As per a report world refined consumption will probably rise by 4.5 per cent both in 2016 and 2017 and at least by 2.7 per cent in 2018. These numbers clearly indicates larger supply and demand deficits resulting in significantly positive copper prices.

A number of recent disruptions in the global copper supply show that the metal’s price rally is supported at least in part by fundamentals. About 415,000 tonnes of copper have been lost so far this year due to disruptions, the majority of which have occurred in recent months. The halt in operations at UK-based Anglo American’s central Chile mine began on November 17 following a dispute over negotiations with contractor companies. On November 17, a landslide caused by heavy rains at Park Elektrik Üretim Madencilik Sanayi ve Ticaret AS’ Siirt Madenköy mine in Turkey caused at least five worker deaths. Operations have been halted this situation is likely to continue till early next year. In addition, overall production in Chile has slipped this year, with year-to-date output falling 4.7 per cent to 4,581,000 tonnes from 4,808,000 tonnes in 2015. Production in October declined to 445,000 tonnes, off 3.4% month-on-month and 11 per cent year-on-year.

The positive PMI Data released by Caxin Services (53.1 against the expectation of 52.7) provided increased support to the copper prices. News of Chinese fund buying and supply disruption of copper concentrate supplies from Mongolia which generally feed the smaller smelters supported the unconfirmed reports that fabricators in China have yet to fully meet their buying requirements. China continues to be the key driver of sentiment, and prices have been susceptible to volatile moves as they are directed by news flow. As long as Chinese demand remains healthy, the risk of a sudden and rapid reversal in the short term remains low. In addition, copper is benefiting from a supply side experiencing sudden tightness. Despite positive market sentiment surrounding copper prices, downside risks are quite high due to a practical growth outlook for China and the USA, as well as the probability of an oversupplied market next year. Thus, in spite of the positivity gripping the copper market, one should invest in the market with caution.

Demonetisation: Positive Move to Strengthen Indian Agriculture

Agriculture plays a vital role in India’s economy. Over 58 per cent of the rural households depend on agriculture as their principal means of livelihood. Agriculture, along with fisheries and forestry, is one of the largest contributors to the Gross Domestic Product (GDP). In 2015–16, agriculture contributed 17.4 per cent to India’s Gross Domestic Product (GDP), as compared to 18.3 per cent in 2013–14. As against the Twelfth Five Year Plan’s (2012–17) target of 4 per cent growth for the agriculture and allied sectors, the growth registered was 4.2 per cent in 2013-14, -0.2 per cent in 2014– 15, and an estimated 1.1 per cent in 2015–16. The agriculture sector in India is expected to generate better momentum in the next few years due to increased investments in agricultural infrastructure such as irrigation facilities, warehousing and cold storage. Factors such as reduced transaction costs and time, improved port gate management and better fiscal incentives would contribute to the sector’s growth. But all these growth momentum has witnessed a temporary jolt as the Government announced the banning of the 500 and 1000 denomination currency notes as a legal tender. 

The major aim of demonetisation of bigger denomination currency was as follows; first, it is an attempt to make India corruption free, second it is done to curb black money, third to control escalating price rise, fourth to stop funds flow to illegal activity, fifth to make people accountable for every rupee they possess and pay income tax return and finally, it is seen as an attempt to make a cashless society and create a Digital India. 

Major benefit of demonetisation in agriculture is that the ban on high value currency will also curb the menace of money laundering. Now such activity can easily be tracked and income tax department can catch such people who are in the business of money laundering. Most of the fake currency put in circulation is of the high value notes and the banning of 500 and 1000 notes will eliminate the circulation of fake currency. This move has generated interest among those people who had opened Jan Dhan accounts under the Prime Minister’s Jan Dhan Yojana. They can now deposit their cash under this scheme and this money can be used for the developmental activity of the country. Most of the people who have been hiding their income are now forced to come forward to declare their income and pay tax on the same. Even though deposits up to Rs 2.5 lakh will not come under Income tax scrutiny, individuals are required to submit PAN for any deposit of above Rs 50,000 in cash. This will help the income tax department to track individuals with high denominations currency. Finally, all the monetary transaction has to be through the banking methods and individuals have to be accountable for each penny they possess. 

Such good are the benefits of demonetisation, but since majority of our agriculture transaction have traditionally been heavily cash dependent, short terms aftershocks of this move were expected. Cash is the primary mode of transaction in agriculture sector which contributes 15% to India’s total output. Formal financing in many parts, especially Punjab, Uttar Pradesh, Odisha, Maharashtra, Gujarat and Kerala is significantly from cooperative banks, which are barred from exchange-deposit of demonetized currency. Notably, this is a time of kharif harvest and start of rabi sowing, partly explaining why this period is dubbed the ‘busy season’ from a standpoint of credit demand, the other being bunching of festivals and weddings. Agriculture is impacted through the input-output channels as well as price and output feedback effects. Sale, transport, marketing and distribution of ready produce to wholesale centres or mandis, is dominantly cash-dependent, disruptions, breaks in the supply chains feedback to farmers as sales fall, increased wastage of perishables, lower revenues that show up as trade dues instead of cash in hand and when credited into bank accounts with limited access affect the sector. 

These were some of the after effects of demonetisation but majority of farming community is slowly learning the new means of trade. But, now farmers are accepting the new mode of transaction (Cashless or Bank to bank Transaction). It is the myth the farmers refuse to accept cheque payment as Small dairy farmers in Andhra Pradesh accept cheques, Sugarcane farmers accept cheques from sugar factories, Moong farmers are accepting cheques from government procurement agencies, Apple farmers accept cheques from large buyers, Potato contract farmers accept cheques from food companies, Maize farmers in Nabrangpur - Odisha's poorest district are accepting cheques, and coconut farmers in Karnataka took cheques from state agencies and such mode of transaction has been increasing day by day. Moreover, Farmers accept insurance and disaster relief cheques. Thus dealing in cheque is not a new mode of transaction for the farmers. In some states government has failed to deliver the payments by cheque not because there is no mechanism, but due to local middlemen resistance. Food Corporation of India tried but failed to pay Punjab and Haryana farmers by cheque for wheat, only because the powerful commission agents want to first deduct the loan repayment amounts. So to portray that the farming community is not at all aware of modern means of cashless transaction is not so appropriate. 

Few issues of cash payment is involved in payment of labourers, transporters and other small channels, cashless mode can be adopted after due persuasion and training. In the current scenario, It is true that the small and marginal farmers who sell off their produce in the village itself are hurt by the demonetisation. Similarly, value chains with minimal processing and direct consumer sales such as fruits and vegetables are hit. Most fresh produce is sold by small hawkers and vegetable mongers in the streets of India. Since they take payment in cash and buy their wares from the mandi in cash, business is down. These are symptoms of the crying need for reform and high time that the new systems are in place replacing the old traditional ones so as to ensure the every person is made accountable for each and every penny one earns. 

The demonetisation has been accepted as a financial cleanup process by the people at large; the governments should make use of demonetisation as an opportunity to secure the economic wellbeing of the poor farmers in the country. The demonetisation could be an occasion to popularize Kisan Credit Cards, while making it available for not only to men farmers but also to all women farmers. The credit card should be in a position to help farmers purchase the needed inputs without much difficulty. 

Demonetisation could then lead to a new era in agriculture provided it is managed and implemented judiciously.