Lack of Sustained Support Keeps Copper Market in Doldrums

The continued weakness in the red metal is seen as an economic uncertainty in expansion of demand. Copper has been a volatile market for most of the past year. Beginning in January 2016, prices saw a slide following the reports of a soft landing for China’s economy. Copper is a key material used in industrial infrastructure, and China uses about 45 per cent of the world’s supply, so any kind of movement in their economic outlook is likely to be reflected in the price of copper around the world. The increased supply of copper against stable demand but low demand is continuously pressuring the copper market.

In 2016 world mine production is estimated to have increased by around 5 per cent, or 1 million MT, with concentrate production increasing by 7 per cent and solvent extraction-electro-winning (SX-EW) declining by 2 per cent. The increase in world mine production in 2016 was mainly due to a 38 per cent (650,000 MT Cu) rise in Peruvian concentrate output that benefitted from new and expanded capacity brought on stream in the last two years, a recovery in production levels in Canada, Indonesia and the United States, and expanded capacity in Mexico and low frequency of supply disruptions due to strikes, accidents or adverse weather conditions. However overall growth was partially offset by a 3.8 per cent (220,000 MT) decline in production in Chile, the world’s biggest copper mine producer, and a 4.5 per cent decline in DRC where output is being constrained by temporary production cuts. On a regional basis, production rose by 6 per cent in the Americas and 11.5 per cent in Asia but declined by 3.5 per cent in Africa while remaining essentially unchanged in Europe and Oceania World refined production is estimated to have increased by about 2.5 per cent (530,000 MT) in 2016 with primary production (Electrolytic and Electro-winning) increasing by 3 per cent and secondary production (from scrap) declining by 2 per cent. Increased availability of concentrates allowed world primary electrolytic refined production to increase by 4.5 per cent. The main contributor to growth in world refined production was China (increase of 6 per cent, or 470,000 MT), followed by the United States and Japan where production increased by 7 per cent and 5 per cent respectively and by Mexico (16 per cent) where expanded SX-EW capacity contributed to refined production growth. However, overall growth was partially offset by a 3 per cent decline in Chile, the second world leading refined copper producer, although primary electrolytic refined production increased by 4.5 per cent, electro-winning production declined by 6.5 per cent due to definitive / temporary closures of SX-EW mines. Production in the DRC and Zambia also declined by an aggregated 11 per cent mainly due to the impact of temporary production cuts. On a regional basis, refined output is estimated to have increased in the Americas (1 per cent) and Asia (6 per cent) while declining in Africa (10 per cent) and in Europe (including Russia) (2 per cent) and remaining essentially unchanged in Oceania.

Worldwide copper production continued to grow in 2016 as it has for all but three of the past 22 years. World copper production has increased 105 per cent since 1994, when the U.S. Geological Survey began estimating global output. While investment in copper mines has slowed significantly from the 2003-2013 to the recent times, the production is still climbing. Given the rebound in the price of copper, we estimate that mines, on average, are earning returns of over 20 per cent on an all-in cost basis, and that the cash margin of producing copper (ignoring overhead costs, depreciation and amortization of equipment) is around 60 per cent.

World apparent refined usage is estimated to have increased by around 2 per cent (430,000 MT) in 2016. Growth was mainly due to an increase in Chinese apparent demand as world usage excluding China is estimated to have increased by only 0.9 per cent. Chinese apparent demand (excluding changes in unreported stocks) increased by around 2.5 per cent based mainly on 6 per cent growth in refined production as in fact net imports of refined copper declined by 7.5 per cent. Usage in the United States and Japan, the second and third leading refined copper using countries, is down by 2 per cent and 2.5 per cent respectively. On a regional basis, usage is estimated to have increased by 3 per cent in Asia (when excluding China, Asia usage increased by 3 per cent) and by 2 per cent in Europe (by 1.5 per cent in the EU), while declining by 3 per cent in the Americas World refined copper balance for 2016 indicates a deficit of around 50,000 MT (including revisions to data previously presented). This is mainly because of a 2.5 per cent increase in Chinese apparent demand. In developing its global market balance, ICSG uses an apparent demand calculation for China that does not take into account changes in unreported stocks [State Reserve Bureau (SRB), producer, consumer, merchant/trader, bonded]. In 2016, the world refined copper balance adjusted for changes in Chinese bonded stocks indicates a deficit of around 42,000 MT. The refined copper market balance for the month of December 2016 showed a small surplus of around 20,000 MT.

On the price front, the upside rally in the price was supported by the fact that China’s economic growth rate stabilized, and even improved slightly. The election of Donald Trump as President had promised increased of fiscal stimulus and significant expansion in infrastructure. The strike at the Escondida mine in Chile which produces 5 per cent of the world’s copper also provided partial support. In the last couple of months, the above stimulus to price have once again given way to increased uncertainty in demand leading to surplus supplies owing to the ending of the workers strike at Escondida, the Trump agenda is running into trouble in Congress and the uncertainty on China’s being be able to boost or even maintain its growth rate. 

In spite of the gloom and uncertainty persisting in the market, the silver lining is noticed in the form of China showing some signs of recovering as more policy stimulus is introduced, at least judging by the rebound in the equity market. In the recently concluded Metal Bulletin’s Copper Conference, experts have opined prices are slightly elevated and given the stock rises, ample availability of copper cathodes and lower premiums but a move towards larger deficits should underpin prices later in the year. The overall outlook for copper seems mildly bullish but there is concern about the high level of copper cathodes stocks, which should be able to delay any impact of concentrate shortages. So there does not seem to be any need for consumers to chase prices higher.

Positive Consolidation in Copper Continue Amidst Increased Supply Disruptions

The copper market continues to consolidate in the tight range as fundamentals driving it has remained consistently docile. No major improvement has been noticed in the demand though the supply side continues to apply the pressure on the prices. Since election of Donald Trump super enthusiastic approach to US infrastructural and a wider positive attitude for risky assets has gone a bit too far pushing up the copper prices which has risen by about 15 per cent he pledged to increase spending on infrastructure in the last quarter of 2016, but since then lack of major thrust on the demand has failed to sustain the upsurge. The other economic activity in the global economies has also failed to support the copper prices. The major economic factors affecting the copper prices are movement in the Dollar index against other currencies, PMI data of China, US, Europe and Latin American countries. 

The market is still being pressured by abundance of supplies and lagging demand. World mine production is estimated to have increased by around 5 per cent (900,000 t) in the first eleven months of 2016 with concentrate production increasing by 7 per cent and solvent extraction-electro-winning (SX-EW) declining by 2 per cent. The increase in world mine production was mainly due to a 41 per cent (630,000 t Cu) rise in Peruvian concentrate output that is benefitting from new and expanded capacity brought on stream in the last two years. A recovery in production levels in Canada, Indonesia and the United States, and expanded capacity in Mexico, also contributed to world mine production growth. However overall growth was partially offset by a 4.3 per cent decline in production in Chile, the world’s biggest copper mine producer, and a 5.5 per cent decline in DRC where output is being constrained by temporary production cuts. On a regional basis, production rose by 6 per cent in the Americas and 10.5 per cent in Asia but decline d by 4 per cent in Africa while remaining essentially unchanged in Europe and Oceania. World refined production is estimated to have increased by about 2.5 per cent (500,000 t) in the first eleven months of 2016 with primary production (including Electro-winning) increasing by 3 per cent and secondary production (from scrap) declining by 1.5 per cent: The main contributor to growth was China (increase of 6 per cent), followed by the United States w here production increased by 10 per cent and Mexico (16 per cent) where expanded SX- EW capacity is contributing to refined production growth. Output in Chile and Japan, the second and third leading refined copper producers, declined by around 2 per cent and increased by about 5 per cent respectively. Production in the DRC and Zambia declined by an aggregated 12 per cent mainly due to the impact of temporary production cuts. On a regional basis, refined output is estimated to have increased in the Americas (2 per cent) and Asia (6 per cent) while declining in Africa (12 per cent) and in Europe (including Russia) (3 per cent) and remaining essentially unchanged in Oceania. 

The global miner BHP Billiton reported it’s planned to halt production at the Escondida mine in Chile (which holds a 57.5 per cent position) due to a workers strike since February. A strike at the world’s largest copper mine faces a critical phase this week as the union expects management to tempt workers with an offer that could end the stoppage in northern Chile. After 30 days of strike, on March 10, BHP Billiton Ltd.’s Escondida can legally make individual offers to workers. If it manages to convince more than half of the workforce, the union will have to concede defeat and end to the strike. On 6th March 2017, the strike at Escondida overtook the 25-day stoppage at the same mine in 2006, which at the time was the longest strike in at least a decade among Chile’s major copper mines. Other mine operators in Chile are watching the Escondida dispute closely as it is expected to set the tone for upcoming negotiations this year. If enough workers do yield, the union is ready to resort to an article of the existing labor code that allows workers to extend their expired contract for 18 months, negotiations would then resume under Chile’s new labor rules, which kick in on April 1 and guarantee existing benefits, which is one of the major sticking points in the dispute. This current disruption of production in Escondida is likely to support the prices in the coming days. Apart from Escondida, Issues in relation to export permits for copper mining in Indonesia further strained world supplies of copper. Freeport-McMoRan, the Phoenix-based mining company operating the Grasberg mine in Indonesia, is facing trouble in exporting copper out of the country due to a ban on ore concentrate exports imposed by the Indonesian government in January 2017.

World apparent refined usage is estimated to have increased by around 2 per cent (475,000 t) in the first eleven months of 2016. Growth mainly due to an increase in Chinese apparent demand as world usage excluding China remained essentially unchanged. Chinese apparent demand (excluding changes in unreported stocks) increased by around 3. 5 per cent based mainly on 6 per cent growth in refined production as in fact net imports of refined copper declined by 6 per cent. Net refined copper imports have been on a declining trend in 2016 with the monthly average in Jul-Nov 36 per cent below that of the 1st half of the year. Monthly average Chinese apparent demand in Jul-Nov 2016 is 7 per cent below that in the first half of the year. Usage in the United States and Japan, the second and third leading refined copper using countries, is down by 2 per cent and 3 per cent respectively. On a regional basis, usage is estimated to have increased by 3.5 per cent in Asia (when excluding China, Asia usage increased by 3 per cent) and by 2 per cent in Europe (by 1.5 per cent in the EU), while declining by 3 per cent in the Americas.

Copper supply set to under-perform demand for much of the next half decade. As the global economy departs from several years of stagnation, so too does the outlook for copper pricing. The combination of stronger than expected Chinese demand, a clear lack of visible copper inventory build, an end to cost deflation, and the U.S.-centric reflation story after the Trump election victory sparked positive price momentum through the latter stages of 2016. On the demand side, there's now little to worry about, since the dramatic crunch in capital expenditure cuts since an extended broad-based commodities slump hit the market in the summer of 2014. In 2016, China's real copper consumption likely rose by 5.7 per cent and for the last phase of the current decade is projected to be in the range of 3 to 7 per cent. 

Long term investment sentiment still remains intact as the reports of supply disruptions and improving global economic scenarios.