Major copper supplying companies and countries are finding it really hard to balance their economy in the wake of sustained weakness in copper demand. The burden of over supply continues amidst lack of increased demand from China (which consumes about 45 per cent of the global supply) and other emerging markets. The slackness in demand has led major copper supplying companies to production cuts and lying off of the expansion plans. Copper consumption in China has been a vital measure of that country’s economic growth as the red metal forms a key network of its infrastructure, transporting water, and conducting electricity. China, with its huge manufacturing sector, is by far the largest consumer of copper. It has been estimated that 70 per cent of copper used in China is imported. Many markets whose returns are positively correlated with China’s industrial/investment cycle (base metals, iron ore, commodity currencies) continued to rise in the spring and early summer of 2016 despite the lack of much lift in Chinese industrial production and fixed asset investment as the authorities provided stimulus, but the copper continues to lag behind on reduced demand and falling prices.
The situation of over supply is likely to continue for the entire 2016 as there are no signs of improvement in demand. Copper got a boost in recent weeks from encouraging economic data from China that signaled stability for the major copper consumer, but the recent check in the infrastructural growth. China, the world’s biggest consumer of copper, cut imports of the refined metal to the lowest level in 18 months in August as domestic production climbed amid increasing foreign purchases of ore and concentrate. Inbound shipments of refined metal slumped for a fifth month to 232,066 MT from 251,235 MT in July and 262,691 MT a year earlier. Refined-metal exports jumped more than four-fold from a year earlier. Purchases of refined metal were still 16pc higher in the first eight months from a year earlier, the data showed, after record shipments in the first half on the back of a credit boom and property rebound.
World mine production is estimated to have increased by around 4.5 per cent (430,000 MT) in the first half of 2016 compared with production in the same period of 2015. Concentrate production increased by 6 per cent while solvent extraction-electro-winning (SX-EW) declined by 1 per cent. The increase in world mine production was mainly due to a 50 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 5.5 per cent decline in production in Chile, the world’s biggest copper mine producer and a 10 per cent decline in DRC where output is constrained by temporary production cuts. The average world mine capacity utilization rate for the first half of 2016 remains practically unchanged from that in the same period of 2015 at around 84.5 per cent. World refined production is estimated to have increased by about 3 per cent (320,000 MT) in the first half 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 4.5 per cent. The main contributor to growth was China (+6 per cent), followed by the United States where production increased by 16 per cent. Output in Chile and Japan, the second and third leading refined copper producers, increased by about 2 per cent and 3 per cent respectively. Refined production in the DRC and Zambia declined due to the impact of temporary production cuts.
Amidst, lack of concrete demand, the marginal fluctuation in prices is been governed by movement in the energy prices, news of supply cuts and movement in dollar prices. Historically, there hasn’t been much of a correlation between copper and energy prices. However, copper and Brent crude oil have had a much higher correlation in the last couple of years. One of the reasons driving commodities lower has been the steep decline in energy prices. If crude oil prices recover as a result of production cuts, we might see an upward price action in copper as well. Copper producers such as Southern Copper (SCCO), BHP Billiton (BHP), and Rio Tinto (RIO would benefit if copper prices increase. It’s worth noting that copper’s long-term fundamentals are better than some of the other commodities such as steel and aluminum. However, in the near term, oversupply and negative global sentiment seem to weigh on copper prices. As per the supply cuts are concerned, Late last year, Glencore — one of the world’s largest copper miners — decided to mothball its largest mines in Africa, taking up to 400,000 MT of copper production off the global market. In Chile, the single largest supplier of copper in the world, the state-run copper commission announced big investment cuts through 2025, eliminating eight mine-development projects worth nearly $23 billion.
World apparent refined usage is estimated to have increased by around 5 per cent (570,000 MT) compared with that in the same period of 2015 mainly due to strong Chinese apparent demand. Chinese apparent demand increased by around 11 per cent based on a 20 per cent increase in net imports of refined copper from the lower net import level in early 2015 and consequently lower apparent demand. Excluding China, world usage remained essentially unchanged. On a regional basis, usage is estimated to have increased by 5 per cent in Europe and 7 per cent in Asia (when excluding China, Asia usage declined by 2 per cent), while declining by 17 per cent and 4 per cent in Africa and in the Americas respectively and remaining essentially unchanged in Oceania.
Now, going by the details of the Chinese market, the global copper status is heading nowhere as the pressure of increasing stock in China is going to pressure the prices any time. Reuters reported that China’s SRB had bought 150,000 MT of copper. That’s quite a big number when we look at annual copper consumption, which is expected to reach 23 million metric tons this year. Moreover, the bonded copper stocks, which are held in free-trade zones in China, have risen over the last few months. The data haven’t been released officially, but Bloomberg estimates the figure at a whopping 600,000 metric tons as of the end of May. China’s bonded copper stocks have risen by 220,000 MT since February 2016. On the demand side, the total floor area under construction (in square meters) by Chinese real estate development enterprises has risen by 4.8 per cent in the first seven months of the year. The rate of growth has fallen 0.2 per cent points as compared to the first six months of the year. In the first seven months of 2016, building sales increased by 39.8 per cent YoY (year-over-year) in China. However, the growth rate has fallen by 2.3 per cent points as compared to the first six months of the year. Thus, we can see that the historically high Chinese imports that we saw earlier this year are not sustainable, as they are not backed by actual end user demand and might ultimately find their way into the Shanghai Futures Exchange warehouses and bonded locations. The above facts clearly explain that all is not well with copper market and it’s not the right time for the new investors to make fresh entry.
