The indecisive sentiment of copper market continues to rule the market over the continued escalation of trade tensions between the United States and China. The supply-demand statistics have for the meantime taken a back seat and the trade directions with regards to the fallout of the trade war have gained impetus. The Global manufacturing activity has already taken a hit from weak orders in August, as a survey showed, a sign that companies are feeling the pinch from the intensifying Sino-U.S. trade war that could derail global growth. Currently, the falling inventories at London Metal Exchange and Shanghai Futures Exchange-approved warehouses are keeping physical prices high in China, as copper premiums are currently at $91 a tonne, close to a near two-year high of $86 (as on November 2016). But, the absence of fresh inflows into warehouses projects a very nervous and twitchy market situation, as there is no real direction to follow and investors, in particular, seem to be trading metals on the basis of influences from other markets. In spite of the strong fundamentals, the copper market may for the short term, embark on a bearish dive if the global currencies continue to weaken significantly following the Turkish route.
The weakness in the red metals is also been accredited to the increasing uncertainty in the currency market as investors are fleeing to the relative safety of the dollar amid Turkey's financial woes and as concern grows that a U.S.-China trade spat will curb economic growth and put more countries under pressure of the steep rising of global debt. Argentina is already feeling the pressure as its peso crashed to a historic low. While previous debt crises involved U.S. households and, later, profligate European governments such as Greece, this time the concerned center's on companies in emerging markets that have borrowed heavily in dollars and euros. The Global debt loads have exploded since the Great Recession in 2008. From $97 trillion in 2007, total household, corporate and government debt grew to $169 trillion last year. The crises are likely to deepen further if FED continues to raise its interest rate in the midst of a healthier U.S. (U.S. dollar, now at its highest level in 13 months). For emerging markets that borrowed in dollars and euros, rising interest rates will make it more expensive to borrow new money or refinance existing debt. That could trigger a wave of defaults by corporate borrowers, with problems spreading far beyond Turkey and ultimately big debt bubble for the United States which can lead to a global financial crisis.
As per the basic fundamentals of copper trade are concerned, the supply continues to improve amidst lesser strikes compared to last year. World mine production is estimated to have increased by 5.7 per cent in the first five months of 2018, with concentrate production rising by 5.5 per cent and solvent extraction-electro-winning (SX-EW) by 6 per cent. The increase in world mine production of about 450,000 t 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 13.5 per cent primarily because production in February/March 2017 was restricted by a strike at Escondida (the world's biggest copper mine) and also because there was an improvement in Codelco's production levels in 2018, Indonesian output increased by 43 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 and a 12.5 per cent increase in SX-EW production in the Democratic Republic of Congo (DRC) and a 13 per cent rise in Zambian mine output due to the restart of temporarily closed capacity. Although no major supply disruptions occurred in the first five months of this year, overall growth was partially offset by lower output at some mines in Canada (-8.5 per cent) and in the United States (-10 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, 8.5 per cent in Latin America, 6 per cent in Asia, 3.5 per cent in Europe and 10 per cent in Oceania and declined by 7.5 per cent in North America. World refined production is estimated to have increased by 2 per cent in the first five months of 2018 with primary production (electrolytic and electro-winning) rising by 0.5 per cent and secondary production (from scrap) increasing by 9 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 6.5 per cent supported by a 5.5 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 9 per cent mainly due to improved production at Codelco. Production in Indonesia and Japan was also substantially higher, recovering from reduced output last year that was due to a strike and maintenance 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 India (shutdown of Vedanta's Tuticorin smelter/refinery in April), in Peru, Poland and the United States. On a regional basis, the refined output is estimated to have increased in Africa (11 per cent), Asia (2 per cent) and Latin America (4.5 per cent) while remaining essentially unchanged in Europe and Oceania and declining in North America (3 per cent). In a major development in India, the refined production in Tuticorin has been stopped which is costing the company around US$ 100 million annually. The smelter has been at a standstill since late March and was sealed by government authorities in May following public, fatal protests against the operation and expansion of the smelter. Vedanta is currently trying to counter the closure and gain access to its facilities using legal means and side by side wants to carry out necessary maintenance work on a leak in the sulphuric acid facility.
On the demand side, the buying spree took off after Beijing announced two weeks ago it would hit $16 billion worth of U.S. imports, including scrap metal (the United States is one of China's biggest copper scrap suppliers), with duties of 25 per cent from Aug. 23 in retaliation for a similar move by Washington. World Copper consumption between January-June 2018 was 11.57 million MT as against 11.53 million MT in 2017. WBMS estimates that imports of refined copper into China were about 350000 MT in June bringing it to 1.86 million MT. Chinese estimated demand for January to June 2018 was 5981 kt which is 5% above the previous year's total and represented over 51% of the global total. Thus, we can see that China's Demand can alone support the global copper market and is nothing to fear for the long-term investors in copper.
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