The new tangent drawn between the US and China has practically brought the entire global copper economy on the brink of inevitable crises as China accounts for nearly half of global copper consumption estimated at 24 million tonnes and the United States accounts for only about 8 per cent. The macro economic factors have successfully prevailed over the copper market sentiments even if the S&D fundamentals are strongly favouring surge in prices. US President Donald Trump's threat to increase tariffs on $200 billion worth of Chinese goods on Friday has raised the risk of an escalation in the trade spat between Washington and Beijing. Washington has accused Beijing of reneging on substantial commitments made during months of negotiations aimed at ending their trade war, counter to which fresh negative signals have come up on China’s threats to use rare earth minerals as a reaction in trade war pushed metal’s price sharply lower. In the situation that the US is imposing tariffs and China retaliates by signals of possible ban on the export of rare earths, there are little chances for any upside action, but rather turning focus fully to the downside.
In the current development, the tone in the continuing trade dispute between the US and China became increasingly harsh in May after a lack of any kind of breakthrough in the on-going talks. As a result, the United States raised its import duties from 10 to 25 per cent on Chinese goods worth about US$ 200 billion. This further increased the risks for global economic development, which didn’t go unnoticed on the copper market and placed additional pressure on the copper price.
In the year 2018, major supplying companies responded to higher demand, and the year- on – year production grew by almost 7 per cent and their revenues were up by 12 per cent. However, 2019 is not looking as good as producers are forecasting a fall in output due to declining grades, higher costs, and the lengthy processes of bringing new projects online at a time when inventory levels are at ten-year lows. The ICSG expects global refined copper output of around 24.8 million MT in 2019, with visible consumption of 25.0 million MT worldwide. This would lead to a slight deficit of 189,000 MT on the global refined copper market in 2019. For 2020, the ICSG forecasts a slightly higher deficit of 250,000 MT and predicts an output of 25.1 million MT and consumption of 25.3 million MT. Reuters also released its latest analyst survey on the copper market in May. The survey result indicates that the global refined copper market will register a deficit of 205,500 MT in 2019, which will then fall to 172,000 MT in 2020. Currently, the preliminary data indicates that world mine production declined by about 1.8 per cent in the first two months of 2019, with concentrate production declining by 1.3 per cent and solvent extraction-electro-winning (SX-EW) by 4 per cent: Although a few countries experienced growth, this was largely offset by declines in two major producing countries, namely Chile and Indonesia. Production in Chile, the world’s biggest copper mine producing country, declined by 6 per cent mainly due to lower copper head grades. Indonesian concentrate production declined by 50 per cent primarily as a consequence of the transition of the country’s major two mines to different ore zones leading to temporarily reduced output levels. After aggregated growth of 13 per cent in 2018, production in the Democratic Republic of Congo (DRC) and Zambia increased by 1.3 per cent in the first two months of 2019 as reduced production at some mines partially off-set ramp-up output at other operations. Production in Peru (the world’s second largest copper mine producing country), Australia, China and Mongolia increased due to improved grades and recovery from constrained output in 2018. On a regional basis, mine production is estimated to have increased by around 2 per cent in Africa, 1 per cent in North America and 5 per cent in Oceania but declined by 3 per cent in Asia, 4 per cent in Latin America and 3 per cent in Europe.
Preliminary data also indicates that world refined production remained essentially unchanged in the first two months of 2019 with primary production (electrolytic and electro-winning) declining by around 0.6 per cent and secondary production (from scrap) increasing by 0.3 per cent. The main contributor to the growth in world refined production was China due to the continued expansion of Chinese capacity. Other countries recovering from production constraints in 2018 such as Australia, Brazil and Poland also contributed to growth. However, overall growth was partially offset by a 15 per cent decline in Chilean output which was mainly due to temporary smelter shutdowns whilst undergoing upgrades to comply with new environmental regulations. Production in India continued to be negatively impacted by the shutdown of Vedanta’s Tuticorin smelter and declined by 45 per cent. Aggregated refined production in the DRC and Zambia has declined by 7 per cent. On a regional basis, refined output is estimated to have increased Asia (2 per cent) and in Oceania (25 per cent) while declining in Africa (-8 per cent), in the Americas (-8 per cent) and remaining essentially unchanged in Europe.
In the recycling market, there is still uncertainty regarding the impacts of the stricter scrap import bans in China. Beijing is likely to introduce a system with import licenses for high-quality scrap (so-called Category 6) starting July 1. To import these qualities, companies have to prove to the Ministry of Ecology and Environment that they have the necessary capacities to process the copper scrap volumes into refined copper or semi-finished products such as wire. This could influence the global copper scrap streams in the short to medium term. The situation is already been aggravated by the fact that China has announced that it would intensify environmental inspections in the future. Amidst, development in China, Malaysia has become an important buyer of copper scrap with low copper contents that was previously imported directly into China and now has become the new hub of dumping of the low grade copper scraps. Seeing the declining grade of copper scrap supplies, Malaysia has resorted to introduction of intensified inspections. As a result, some shipments have even been turned away, and other ships have been prevented from unloading their freights, mostly containing scraps of copper cable scrap and old engines, in the harbour. This step has led European copper scrap market to loose significantly by lower demand from Chinese companies and its lack of access in the Malaysian market.
The demand scenarios still remains robust and consistently in support of increased positivity in the overall copper market long term scenario. If we consider the demand for electrical cars (only in UK), which is harbouring 31.5 million cars on the UK roads – the shift from traditional fuel based to electric system would require a minimum of 207,900 MT of cobalt (just under twice the annual global production), 264,600 MT of lithium carbonate (LCE) (three quarters the world's production), 7,200 MT of neodymium and dysprosium (nearly the entire world production of neodymium) and 2,362,500 MT of copper (more than half the world's production). Thus, if such is the potential of one single country, the global transformation would inevitably result in significant surge in demand way beyond the capacity of the miners currently active in the world. Thus, in spite of the short term instability in investment scenario created by the Sino – US trade conflict; the long term investor should continue to have great confidence in the market.
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