The global copper market is currently at the receiving end amidst growing economic tensions as the difference between the US and China's Trade relations widened further. The tightening of trade relations has resulted in weak demand from China where its manufacturing sector is slowing down. From 6th of July 2018, US is due to begin enforcing tariffs on more than $30 billion (25.8 billion euros) in Chinese imports as retribution for what Washington describes as Beijing’s theft of US technology and other unfair trade practices. Amidst fear of its implementation, the Chinese currency has already slid to the 11-month low. Reciprocating the US move, China is also likely to respond with its own tariffs immediately. The recent slump in the global copper prices has given a strong jolt to Chile’s copper economy which responsible for almost a third of global production.
Regarding the copper supplies, the market is likely to experience a persistent undersupply over the coming years, as global consumption growth, driven by China's power and infrastructure sectors and increasingly by rising electric vehicle (EV) production, continues to outpace supply growth. As per the current levels is concerned, world mine production is estimated to have increased by 7.1 per cent in the first quarter of 2018, with concentrate production rising by 7 per cent and solvent extraction-electro-winning (SX-EW) by 7.3 per cent. The increase in world mine production, of about 330,000 MT copper, was mainly due to constrained output in the comparative period of 2017 namely in Chile and Indonesia. Production in Chile, the world’s biggest copper mine producing country, increased by 19 per cent mainly because production in February/March 2017 was constrained by a strike at Escondida (the world’s biggest copper mine) and also due to an improvement in Codelco’s production levels. Indonesian output increased by 58 per cent because comparative output in 2017 was negatively affected by a temporary ban on concentrate exports that started in January and ended in April. A 9.5 per cent increase in SX-EW production in the Democratic Republic of Congo (DRC) and a 16 per cent rise in Zambian mine output due to the restart of temporarily closed capacity. Although no major supply disruptions occurred in the first quarter of this year, overall growth was partially offset by lower output at some mines in Canada (-10 per cent) and in the United States (-7.5 per cent). After a strong increase in the last few years due to new and expanded capacity, output in Peru (the world's second-largest copper mine producing country) has levelled off. On a regional basis, mine production is estimated to have increased by around 11 per cent in Africa, 7 per cent in the Americas, 6 per cent in Asia, 4 per cent in Europe and 5 per cent in Oceania.
World refined production is estimated to have increased by 3 per cent in the first quarter of 2018 with primary production (electrolytic and electro-winning) rising by 2.3 per cent and secondary production (from scrap) increasing by 6 per cent. In tonnage terms, the main contributor to growth in world refined production was China due to its continued expansion of capacity. Production in Chile was up by 8 per cent supported by a 9.5 per cent increase in electro-winning (SX-EW) production mainly because comparative output in 2017 was constrained by the strike at Escondida referred to previously. In addition, primary electrolytic production increased by 6 per cent mainly due to improved production at Codelco. Production in Indonesia and Japan was also substantially higher, recovering from constrained output last year that was due to a strike and maintenances shutdown respectively. Increases in electro-winning (SX-EW) output in the DRC and Zambia also contributed to world refined production growth. However, overall growth was partially offset by declines in Peru, Poland, and the United States. On a regional basis, a refined output is estimated to have increased in Africa (7 per cent) and Asia (4 per cent) while remaining essentially unchanged in Europe and in the Americas.
On the Demand side, China was the biggest contributor to growth with usage increasing by around 5 per cent. This was driven by a 10 per cent increase in net refined copper imports. Usage in the rest of the world fell by about 1 per cent. The global refined copper balance for the first quarter of 2018 indicates a surplus of about 150 000 MT. Thus we can see that the balance for the long-term copper fundamentals is strongly tilted towards, the positivity in the prices, though the short-term balance has been disturbed owing to the possibility of Trade War between US and China.
In the recent development, copper bulls have been growing increasingly worried about signs of a slowdown in China’s own manufacturing engine, with fixed asset investment and purchasing manager indices weakening. The state-controlled Chinese Media have already started to use words such as “irrational overreaction” and warn investors, not to panic, which hints towards a bigger uncertainty in the Chinese economy. The US initially have applied 25 per cent tariffs on a list of goods worth $32 billion annually on about 818 product categories. The second tranche of 284 goods valued at $16 billion — which would bring the total to $50 billion is also on the cards. The tariffs hit a broad spectrum of Chinese goods — like passenger vehicles, radio transmitters, aircraft parts and computer hard drives. China, on the other hand, has targeted vehicles and many agricultural and food products, such as soybeans, which would hit US farmers hard.
On the global economic front, copper prices fell to their lowest level in nearly a year, weighed down by weak global manufacturing data and a rising dollar. A private study has shown that growth in China’s manufacturing sector dropped in June, raising concerns over the effect of an intensifying trade conflict with the U.S. China is the world’s largest consumer of copper and many other raw materials. Manufacturing activity in the Eurozone also slowed. The weaker numbers raised concerns over demand for copper, which is used extensively in manufacturing and construction.
In spite of the negativity being spread owing to the fear of trade war, the fundamental support is still strongly supporting the market. The resulting supply gap was filled by the large influx of scrap copper into the Chinese marketplace and that largely balanced the year's copper supply-demand equation. According to the International Copper Study Group, there was a deficit of 135,000 MT over the year or a little more than two days of world demand. The new Chinese policy was partially implemented early this year with a ban on low-grade scrap and has resulted in a significant drop in their scrap imports. It has also caused some low-grade material (e.g., motor windings, insulated copper wire) to go into other Asian markets for upgrading before making its way into China. The spot price of copper may have fallen, but the spreads remain tight, which is a much clearer indicator of pure physical market dynamics. Lastly, the big hedge funds have the tendency to swing the copper price up and down whilst trying to manage risk and run multi-asset strategies, as there is a correlation at a higher level, but the fundamentals must never be forgotten, because when the dust settles, the price momentum can come back with a double-quick pace.
No comments:
Post a Comment