The year 2017 had been a prosperous year for copper as its prices moved higher amidst increased positivity in the market and overall optimism in the demand from China and other user country. The disruptions in supplies also amply supported the bulls which had increased the output costs. As hopes for synchronized economic growth in 2018 rise, there is a brighter outlook for industrial demand of copper. The Asian nation is no longer the sole marginal driver for copper as the US and global growth is holding is demand on the higher side which would ensures that the copper prices in all likelihood remain well supported. The increase prospective demand is also likely to come from the developing economies where infrastructure and urbanisation are essential for reaching the next stage in their expansion.
The supply disruption could be the main stay for the copper market in the year 2018, as this year there are a lot of labor contracts in Chile and Peru coming up and you can expect those negotiations to be challenging and it could be supported from a supply standpoint. In 2017, we saw labor-related incidents at several mines (ANTO) including mines owned by Southern Copper (SCCO) and Teck Resources (TECK). Since copper prices are currently near multiyear highs and commodity markets seem to have put the worst behind them, labor unions might be a bit more demanding during labor negotiations. There are between 20 and 25 collective negotiations expected (locally in Chile & Peru) and if some of them lead to significant strikes that would have a positive impact on prices. Among the most notable mines that will be negotiating labor contracts in 2018 are BHP Billiton’s Escondida, which is the largest copper mine globally. The mine faced a labor action last year that negatively impacted BHP Billiton’s copper production. Chile's state copper commission has predicted a global copper supply deficit of 175,000 tonnes in 2018, versus 67,000 in 2017.
World mine production is estimated to have declined by 2.6 per cent in the first ten months of 2017, with concentrate production declining by 2.2 per cent and solvent extraction-electro-winning (SX-EW) declining by 4.3 per cent. The decline in world mine production was mainly due to a 2 per cent decline in production in Chile, the world’s biggest copper mine producing country which was negatively affected by the strike at the Escondida mine and lower output from Codelco mines, reductions in concentrate production in Argentina, Canada and Mongolia of 55 per cent, 17 per cent and 17 per cent respectively were mainly due to lower grades in planned mining sequencing and Argentina’s Alumbrera mine approaching end of life, a 15 per cent decline in Indonesian concentrate production as output was constrained by a temporary ban on concentrate exports that started in January and ended in April and a 12 per cent decline in production in the United States mainly due to lower ore grades, reduced mining rates and unfavourable weather conditions at the beginning of the year. However these reductions in output were partially offset by 32 per cent and 3.5 per cent increases in Kazakhstan and Peruvian concentrate output, respectively, with both countries benefitting from new and expanded capacity that was not yet fully available in the same period of last year. Brazil, Mexico, Myanmar, Spain and Sweden also contributed to world growth. On a regional basis, mine production is estimated to have declined in Africa by 1 per cent, in the Americas by 3 per cent, in Asia by 4 per cent and in Oceania by 3 per cent while increasing in Europe (including Russia) by 2 per cent. World refined production is estimated to have remained essentially unchanged in the first ten months of 2017 with primary production (electrolytic and electro-winning) declining by around 2 per cent and secondary production (from scrap) increasing by 9 per cent. Increased availability of scrap allowed world secondary refined production to increase, notably in China. The main contributor to growth in world refined production was China (increase of 5 per cent), followed by India (7 per cent) and some EU countries recovering from maintenance shutdowns in 2016. However, overall growth was offset by 8 per cent decline in Chile, the second largest refined copper producer, where both primary electrolytic refined production and electro-winning production declined. Production also declined in the third and fourth world leading refined copper producers, namely, Japan (-4 per cent) and the United States (-10 per cent). On a regional basis, refined output is estimated to have increased in Asia (3 per cent) and in Europe (3.5 per cent) while declining in Africa (2 per cent), in the Americas (8 per cent) and in Oceania (10 per cent).
On the demand side, the key driver for the same would be China since the country accounts for roughly half of global copper consumption. We have witnessed some moderation in China’s construction activity in the second half of 2017. There are also concerns that China’s construction boom, which lifted its economic activity last year, might not continue in 2018. Looking at copper, it’s more of a late cycle metal when it comes to the construction sector, unlike steel which is used in the initial stages of construction. So we might not see much of a negative impact on copper demand in 2018 from the expected slowdown in China’s construction activity. China’s automotive sector has also been strong. Although the sales tax cut, which gave a boost to Chinese car sales, is being completely withdrawn in 2018, it might not have a major impact on China’s automotive sales. China’s industrial sector has also been reasonably strong, which could support copper demand in 2018.
Copper, like other metals, is widely recycled. Last year, we saw improved scrap flows as copper prices moved to higher price levels. Higher scrap flows helped blunt some of the supply shortfall that resulted from strikes at leading mines. Over the last couple of years, China has taken several measures, including curtailing its polluting steel, coal, and aluminum plants, to help reduce the smog during the winter months. Global copper scrap markets might need to readjust themselves since China plans to ban certain grades in 2019. Energy prices tend to impact commodity market sentiments. Along with boosting copper market sentiments, higher energy prices have an impact on copper miners’ production costs. Other factors supporting the bullishness in copper are the passage of the tax reform bill which has raised hopes of growth in the United States and the strengthening of US Dollar owing to expected repatriation of overseas profits.
While the markets focus on Chinese copper demand, the other half of the demand, which is the world ex-China, tends to be overlooked. In 2018, we could see a strong copper demand from the world ex-China. The Federal Reserve raised its outlook for US economic growth in December 2017. Economic activity has been strong in the Eurozone, largely defying concerns over a hard Brexit. Looking elsewhere, economic activity has been reasonably bullish in emerging economies such as India.
