The long-term firm demand of copper from China has excessively been down played by the recent trade war between China and US. It is clear from the metals prices that the Chinese economy is slowing down. Trump threw his tariff tantrums as the Chinese government was getting tough on unregulated lending. This declining demand pattern was well reflected in the decelerating growth numbers of Chinese manufacturing sector which has raised immense pressure on policymakers as U.S. tariffs appear to be inflicting a heavier toll on the Chinese economy. A private survey has reflected that the growth in the Chinese factory sector stalled after 15 months of expansion and the export orders are falling sharply. Tensions between the world’s two largest economies have battered prices of resources across the board, but the move in copper is notable because of its heavy use in construction and manufacturing. Further, a weaker global growth outlook caused by an escalating trade dispute is likely to significantly dent the demand. It's not entirely clear how that pans out — the idea that we're going to see a resolution in October or November looks unlikely as US has reiterated that it was “too soon” for Washington to talk to Beijing about working out a deal on trade, suggesting U.S. tariffs have yet to exert enough pressure to force Beijing into making concessions at the negotiating table, so a protracted battle means again as we look into 2019, the growth trajectory looks uncertain, so that growth would need to be upgraded before more investors gets meaningfully associated.
Investors also need to keen monitor the swings in the dollar, as for much of the year, a stronger dollar has made copper and other commodities denominated in the U.S. currency more expensive for overseas buyers. The dollar climbed to a 15-month high in August but has since come down 0.8 per cent, relieving some pressure on commodities. While US-China trade tensions are unlikely to fade, China’s growth-supportive policy response will likely spur a year-end rally in some of the weakest performing commodities sectors. Copper, often considered a bellwether of global growth, gained 5 per cent in September, helped by optimism that broader US tariffs would prompt China to invest more heavily in areas like infrastructure to support its domestic economy.
Amidst, the increased uncertainties in the global economic scenario, the supply and demand has also changed marginally. The supply of copper has improved while the demand has slowed down. On the demand side, World mine production is estimated to have increased by 5 per cent in the first half of 2018, with concentrate production rising by 5 per cent and solvent extraction-electro-winning (SX-EW) by 6 per cent: The increase in world mine production of about 485,000 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 12 per cent primarily because production in February/March 2017 was restricted by a strike at Escondida (the world’s biggest copper mine) and because there is an improvement in Codelco’s production levels in 2018, Indonesian output increased by 40 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 16 per cent increase in SX-EW production in the Democratic Republic of Congo (DRC) and a 12 per cent rise in Zambian mine output due to the restart of temporarily closed capacity. Although no major supply disruptions occurred in the first half of this year, overall growth was partially offset by lower output at some mines in Canada (-7 per cent) and in the United States (-8 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 10 per cent in Africa, 8 per cent in Latin America, 5.5 per cent in Asia, 3 per cent in Europe and 8 per cent in Oceania and declined by 6 per cent in North America.
World refined production is estimated to have increased by 2 per cent in the first half of 2018 with primary production (electrolytic and electro-winning) rising by 0.3 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 4.7 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 10 per cent mainly due to improved production at Codelco. Production in Indonesia and Japan was also substantially higher, recovering from reduced output last year as a consequence of a strike and maintenance shutdown. 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 a 20 per cent decline in India’s output due to the shutdown of Vedanta’s Tuticorin smelter in April and declines in production in Poland and the United States as a consequence of maintenance shutdowns. On a regional basis, refined output is estimated to have increased in Africa (11 per cent), Asia (2 per cent) and Latin America (5 per cent) while remaining essentially unchanged in Europe and declining in North America (2.5 per cent) and Oceania (5 per cent).
On the demand side, world apparent refined usage is estimated to have increased by about 1 per cent in the first half of 2018. China was the biggest contributor to growth with apparent usage (excluding changes in unreported stocks) increasing by 4 per cent, driven by a 17 per cent increase in net refined copper imports (as Chinese customs have temporarily suspended the publication of copper trade data since March, exports are calculated based on reversed trade and are likely to be revised). Preliminary data indicates that world ex-China usage declined by 1.5 per cent. Among other major copper using countries, demand increased in India and the EU but declined in the United States and remained essentially unchanged in Japan.
Over recent weeks and months, new trade agreements have calmed the waters for international commerce. The U.S. and European Union have come close to an agreement. The most significant issue facing the copper market, industrial commodities, and the companies that produce them has been the trade dispute between the U.S. and China. Commodities are on the front lines of the conflict which creates barriers for the flow of the raw materials around the world, and copper is no exception. China is the leading consumer of these commodities, and the trade issues have weighed on the Chinese economy. The escalation of the trade dispute over recent weeks continues to stand in front of any substantial comeback in the price of copper. I continue to believe that the solution to the current dispute will come from an economic summit between China's President Xi and U.S. President Trump in the coming weeks or months and the copper would re-embark on positive trend.
