Over the last quarter the copper prices have dipped by about 9 per cent on news of slackening demand from China, though the long term base fundaments still strongly favours the bulls. Strong global economic growth is driving demand for the red metal. The Organization for Economic Cooperation and Development raised its global growth forecast for 2018 and 2019 to 3.9 per cent from a previous estimate of 3.6 per cent. The agency expects a rebound in trade and global business investment to lead the way for global growth. Although Chinese imports of the metal declined slightly in February on a monthly basis, it rose on a year-over-year basis. In the first two months of 2018, China's unwrought copper imports increased 10.4 per cent from the same period last year and copper concentrate imports rose 14.5 per cent year over year. Moreover, China's Industrial output grew 7.2 per cent year over year in the first two months of 2018 compared with 6.2 per cent last December and above 6.1 per cent projected by analysts. Therefore, the emerging market nation has been showing signs of strong growth despite facing risks like the crackdown on pollution, increasing financial threats and concerns surrounding possibilities of a trade war with Trump-led United States.
The Asian nation is no longer the sole marginal driver of the industrial metals. With US and global growth holding up, the industrial metals will in all likelihood remain supported. On the supply side, there are series of contract negotiations at mines in Chile and Peru, “which may not go smoothly” and so could support prices. World mine production is estimated to have declined by around 2 per cent in 2017, with concentrate production declining by 1.6 per cent and solvent extraction-electro-winning (SX-EW) by 3 per cent: Mine production fell 4 per cent YoY in the 1st half of 2017 due to a series of supply constrains but the situation improved in the 2nd half with output remaining essentially flat YoY but increasing by 10 per cent compared to the 1st half 2017. The reduction in world mine production was mainly due to a 1 per cent decline in Chile, the world’s biggest copper mine producing country which was negatively affected by the strike at the Escondida mine in the first part of the year and lower output from Codelco mines, reductions in concentrate production in Argentina, Canada and Mongolia of 59 per cent, 14 per cent and 14 per cent respectively that were mainly due to lower grades in planned mining sequencing and Argentina’s Alumbrera mine approaching end of life, a 12.5 per cent decrease 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 fall 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 30 per cent and 4 per cent increases in Kazakhstan and Peruvian mine production respectively, with both countries benefitting from new and expanded capacity that was not yet fully available in 2016. Brazil, Mexico, Myanmar, Spain and Sweden also contributed to world growth. On a regional basis, mine production is estimated to have declined in the Americas by 2 per cent, in Asia by 4 per cent and in Oceania by 5 per cent while increasing in Africa and Europe (including Russia) by 2.5 per cent and 2 per cent respectively.
World refined production is estimated to have increased by 0.6 per cent in 2017 with primary production (electrolytic and electro-winning) declining by 0.15 per cent and secondary production (from scrap) increasing by 4.5 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 (6 per cent) and some EU countries where output recovered after maintenance shutdowns in 2016. However, overall growth was offset by a 7 per cent decline in Chile, the second largest refined copper producer, where both primary electrolytic refined production and electro-winning production fell. Production also decreased in the third and fourth ranked refined copper producers, namely, Japan (-4 per cent) and the United States (-12 per cent) mainly due to maintenance shutdowns at several plants. On a regional basis, refined output is estimated to have increased in Africa (1.5 per cent), in Asia (3.5 per cent) and in Europe (3.7 per cent) whilst declining in the Americas (7.5 per cent) and in Oceania (15 per cent). . The supply volume (mining and recycling) is stable at this time. With the long-term forecasts of increasing demand (particularly in China), we may see copper-based wire and cable products increasing in price over at least the next five years.
The copper bears are also fancying their chances as fears of a global trade war take center stage. Copper came under selling pressure after the United States Department of Commerce released its Section 232 findings in mid-February. While other factors also seem to be at play in copper’s price action, the risk of a global trade war seems to be weighing heavily on investors’ minds. Apart from the above major development in the global economy, the demand fundamentals in copper still too strong.
Nearly 50 per cent of the demand for copper comes from the construction industry and 17 per cent from the electrical sector. Copper is also used extensively in heavy and light engineering and in transport industries. The market demand for copper is still rising strongly on the back of phenomenal growth in China, India and other emerging market economies. In China, the growth has been a staggering 15 per cent per year. Stockpiles of copper have been in sharp decline the last few years. It is this scarcity that has driven prices higher while commodities traders out-bid each other as they scramble for available supplies and hedge on futures. Supply has fallen behind the growth of demand and prices can move in only one direction when this happens.
The flexibility in the supply of copper is low. Supply is usually unresponsive to price movements in the short term because of the high fixed costs of developing new extraction processes and plants, which typically involve lengthy lead-times. Due to that pressure, investors seem resistant to investing in new copper mining facilities at this time. If existing copper mining businesses are working close to their current capacity, then a rise in world demand will simply lead to a reduction in available stocks. Current copper supply and demand issues may not bring the market back into equilibrium for many years.
