Between January 2016 and the end of 2017, prices soared 72 per cent as China’s pace of growth picked up and the rest of the world economy boomed. For 2018, however, copper prices had fallen 18 per cent by late November amid concerns over trade wars, U.S. fiscal and monetary policy, Brexit, the Italian debt situation and a possible slowdown in China. The first half of the year faired positive and stable but once the trade war burst onto the scene it smothered all positive expectations and market witnessed significant slump. The slowing of the Chinese demand is adding pressure on the copper market. Copper Market is currently feeling the pressure of increased economic uncertainty and lack of concrete demand direction. The supply of copper in 2018 is ever on the rise as the copper majors’ smoothly negotiated wages at large scale mines putting the large scale disruptions at bay for the entire year and the repeat of 2017’s supply disruption was averted. An increasing flow of copper emanating from the world’s mines makes copper especially sensitive to any slowdown in demand growth. The coming year of 2019 is expected to be more promising with expected supply increase of over 1.5 per cent and increased demand of scrap in the global market.
The global supply of copper is expected to slowdown in 2019, as production at the Grasberg Copper Mine in Indonesia, operated by Freeport McMoran and Rio Tinto is expected to fall by more than 50 per cent next year as the transitions in underground operations is likely to happen. The transition is expected to reduce copper supply in the market by about 300,000 metric tons, or 1.5 per cent of annual copper mine production. BHP Billiton Ltd’s Escondida Copper Mine in Chile is also expected to produce less copper this year. Currently, the World mine production is estimated to have increased by about 2.8 per cent in the first nine month of 2018, with concentrate production rising by 2.7 per cent and solvent extraction-electro-winning (SX-EW) by 3 per cent. The increase in world mine production of about 410,000 MT copper was mainly due to constrained output in 2017 (mainly in Chile, Indonesia and the DRC). The production in Chile, the world’s biggest copper mine producing country, increased by 7 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 has been an improvement in Codelco’s production levels in 2018. The Indonesian output increased by 23 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. The SX-EW production in the Democratic Republic of Congo (DRC) increased by 11 per cent and Zambian mine output increased by 9 per cent due to the restart of temporarily closed capacity in both countries. Although no major supply disruptions occurred in the first nine months of this year, overall growth was partially offset by lower output in Canada (-11 per cent) and in the United States (-4.5 per cent). After a strong increase over the last few years due to new and expanded capacity, output in Peru (the world’s second largest copper mine producing country) has stabilized. On a regional basis, mine production is estimated to have increased by around 7.5 per cent in Africa, 4 per cent in Latin America, 3 per cent in Asia and 8 per cent in Oceania but declined by 5 per cent in North America and remained essentially unchanged in Europe. World refined production is estimated to have increased by 1 per cent in the first nine months of 2018 with primary production (electrolytic and electro-winning) declining by 1.3 per cent and secondary production (from scrap) increasing by 12 per cent. The main contributor to growth in world refined production was China due to its continued expansion of capacity. Production in Chile was up by 3.5 per cent mainly supported by a 9 per cent increase in primary electrolytic production as output was constrained in the comparative period of 2017 due to a series of smelter maintenance shutdowns. Production in Indonesia and Japan was also substantially higher, recovering from reduced output last year. 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 32 per cent decline in India’s output due to the shutdown of Vedanta’s Tuticorin smelter in April and declines in production in Australia, the Philippines, Poland, and the United States as a consequence of maintenance shutdowns and operational issues. On a regional basis, refined output is estimated to have increased in Africa (10 per cent), Asia (1 per cent) and Latin America (2.5 per cent) whilst remaining essentially unchanged in Europe and declining in North America (-5 per cent) and Oceania (-8 per cent).
On the demand side, China consumes 40-50 per cent of the world’s copper supply, making it by far the world’s dominant consumer. China’s economy did well in 2018, growing at 6.5 per cent though; the strength of China’s current demand for copper is faced with concerns about the future. The trade dispute between the US and China might impact the Chinese economy, shaving a few tenths of one per cent off the country’s growth going forward. So long as China’s growth remains strong, copper prices can probably remain near their current levels. But any signs of slowing in China, and copper prices would have a long way to fall. For the world market, China is a particularly difficult source of demand to replace in the event of its slowdown. While India continues to grow at around 7-8 per cent, its economy is only one-fifth the size of China’s. Meanwhile, the other BRICs (Brazil and Russia) are likely to struggle. The recent selloff in oil could be bad news for copper demand from Russia, Brazil and other oil producers.
The other factor vastly affecting the copper prices is the strengthening dollar. If the U.S. economy is sufficiently robust to support continued monetary tightening, USD might strengthen considerably to the probable detriment of copper prices. However, it is also possible, perhaps even likely, that the Fed will soon pause or significantly slow its tightening pace, depriving the dollar of the upward pull of rising short-term interest rates. Moreover, if over-tightening of dollar unintentionally produces an economic slowdown or recession that could have unpredictable effects on copper. Any dollar weakness would most likely be bullish for copper prices. The weakness in European market is also expected to affect the copper trade. In 2019, Europe is likely to face two key tests that may influence copper price - Brexit and the Italian debt situation. If Brexit turns out badly for the British pound (a no-deal exit) this could pull the euro down to the benefit of USD. The same could happen if the Italian debt situation spirals out of control. The Italian debt situation is particularly worrisome given that the European Central Bank has bought European debt up to its legal limit and a second European debt crisis would be of much greater economic consequence than Brexit.
