Copper Reeling under Sustained Slowdown in Chinese Economy

Weaker demand from China has caused copper prices to fall to levels not seen since 2009, and mining groups are feeling the pain as signs of recovery have almost disappeared from any near vicinity. There is currently a strong feeling that the story of 2009 (year of great financial crises), might be repeated in case of mining industry as in most of the commodities, the prices are falling and assumptions for demand, investment, jobs and shareholders’ dividends are being ripped up on sustained basis.

Emerging markets are usually fuelled by manufacturing growth, with high demand for energy and materials giving them a strong correlation with commodity prices. This relationship can be seen more clearly if we track commodity performance alongside the economic slowdown we’ve seen in China over the past several years. After more than a decade of outstanding double digit GDP growth figures, China has finally begun the long wind-down from those unsustainable highs to settle into a more stable and conservative growth rate. The collapse of the 2002-2012 commodities “super cycle” appears to be highly correlated with slowing Chinese demand. During the period, China experienced annual GDP growth that averaged 10.6 per cent and became a major importer of commodities which helped drive prices higher. But, ever since the slow down commenced the fall in the copper prices have gained pace and dropped over 50 per cent.

Copper is one of the most economically sensitive commodities. Copper has declined quickly, sinking under six-year lows and reflecting the panic recently seen in the Chinese stock market. If we look at Peru, a country where copper accounts for 20 per cent of its total exports, we can see the rise and fall of copper. During the super cycle, copper was in high demand by China and other emerging economies and Peru experienced growth in excess of 7 per cent. However, since 2013, Peru’s annual GDP growth has fallen from 7 per cent to just 1 per cent currently. Thus, it’s a sobering reality that China’s economic boom was the primary supporter of copper prices. Thanks to years of high demand, copper producers ramped up output, which has now created a supply glut, just as China’s copper demand wanes.

Looking after the developments in the Chinese economy, one can say that the problem of plentiful supply of copper is not going to be a temporary phase for the global industry. First, Beijing knows that huge infrastructure spending, as a proportion of GDP, is unsustainable. The authorities are trying to encourage consumption by consumers instead. Second, China, overburdened with debt, can’t afford a repeat anyway. The other difference from 2009 is more encouraging for the producers. Balance sheets are stronger and most mining companies, instead of placing blind faith in “stronger for longer” commodities Super Cycle, have been talking the language of production efficiency and investment discipline.

The recent development in the Chinese economy continues to rattle the copper investor giving its price a steep falling experience. Copper's latest drop follows a reading of Chinese manufacturing activity that shocked the market. The copper price is down 17 per cent so far this year. The Caixin manufacturing purchasing managers' index (PMI) for July fell by more than expected to a two year low of 47.8. A reading below 50 indicates a contraction and the Caixin index has shown shrinking output, orders and prices for five straight months. China, the world's second largest economy, is responsible for 45 per cent of total global copper demand of some 22 million MT and the country's PMI data is particularly closely correlated to the copper price as the graph shows. The weak readings partly reflect temporary disruptions to factory activity as a result of a number of tropical storms that hit China’s key manufacturing hubs over the past month. In addition, recent stock market volatility probably hurt business sentiment and led firms to provide more downbeat responses to the latest PMI surveys.

Apart from the Chinese economic slowdown news, global demand supply situation, economic development in US, Europe and other economic issues have also affected the copper prices.

The global supply side of the copper market continues to be firm and the market continues to be surplus on the supply front. World mine production is estimated to have increased by around 3 per cent (175,000 MT) in the first four months of 2015 compared with production in the same period of 2014. Concentrate production increased by 3 per cent while solvent extraction-electrowinning (SX-EW) increased by 3.5 per cent. The increase in world mine production was mainly due to a recovery in production levels at mines in Indonesia and Chile, although the latter also benefited from production at mines that started last year. Production in Peru increased by 4 per cent and in the United States production declined by 6 per cent. World refined production is estimated to have increased by around 3 per cent (210,000 MT) in the first four months of 2015 compared with refined production in the same period of 2014: primary production was up by 2 per cent and secondary production (from scrap) was up by 8.5 per cent. The main contributor to growth was China (up by 6 per cent), followed by the Philippines and Indonesia where production was reduced in the first quarter of last year due to operational constraints. Production also increased in the DRC (+14 per cent). Output in Chile, Japan and the United States (the second, third and fourth leading refined copper producers) each declined by around 4 per cent.

On the demand side, in the first four months of 2015, world apparent usage is estimated to have declined by around 4 per cent (290,000 MT) compared with that in the same period of 2014. Chinese apparent demand declined by 5 per cent (165,000 MT) based on a 14 per cent decrease in net imports of refined copper from the high net import level in early 2014 and consequently higher apparent usage. Excluding China, world usage has declined by around 3 per cent in the first four months of 2015 mainly due to a decline of 43 per cent in Russia’s apparent usage (following the withdrawal of Russia’s cathode export tax in September 2014) and a decline of 6 per cent and 7 per cent in Japan and the EU, respectively.

Copper has shed about a fifth of its value over the past three months. The metal is currently trading lower than supply/demand fundamentals would warrant in spite of the few supporting news as reports of many mine disruptions, strike at a Codelco mine in Chile, power shortages shutting down Zambia’s largest copper mine, and partial resolving of the Greece crisis. Such positive news for the market has been greatly negated by the firmer dollar that has restricted the recovery in the metal prices.

The strong U.S. dollar / weak producer currency environment continues to weigh on the industrial metal complex, but we are starting to see some signs of a producer response, but most markets have not yet reached a critical mass of closures. Thus we feel that till the Chinese government desires to implement financial and structural reforms to boost long-term growth the metal market would continue to trade in the Red Zone with further unexpected falls.

Copper’s Prolonged Weakness Testing Patience of Investors

The pressure of huge stocks and declining consumption demand has led to a steady decline in the global as well as domestic copper prices. The slowdown of the key global economies has led to a significant shrinking of copper demand. The major factors pulling the copper prices off-track are the slow Chinese demand, uncertainty in the European market, weak US demand simultaneously compounded by an increased supply of recycled copper. 

The global trade in copper has shown a significant weakness. One of the major reasons for this has been subdued demand from China’s State Grid Corp, the world’s largest utility, which had previously planned to spend more than Renminbi (rmb) 40 billion on electrical grid constructions in 2015. With the current state of growth, the Chinese demand is likely to slow down to 4 per cent in 2015 against 5.5 per cent reported last year. As per data from the Shanghai Futures Exchange, which monitors the stock-levels of copper in China, the amount of copper stored in the country jumped from 4 per cent of global stock in 2009 to 38 per cent last year.

The interest rates in China being higher than international levels – provided a popular trade practice i.e. of borrowing money at the dollar interest rate using a letter of credit from a domestic bank to import commodities. However, with an eye on providing support to the equity markets , last month China cut interest rates again - the fourth time in eight months, with the benchmark one-year lending rate now at a record low of 4.85 per, thus intending to halt the collapse of domestic equities. China’s recent moves to cut interest rates would also “significantly reduce” its demand for copper, thus affecting global producers. Owing to increasing importance attributed to the Shanghai copper holdings as a proportion of the global copper market, the unwinding or change in interest rate differentials would have significant impact on global commodity market pricing and trading. There is strong evidence to conclude that copper stocks have been piled up at warehouses mainly “to facilitate a carry trade under capital controls.” The “carry trade” involves speculators borrowing in US dollars to buy Chinese assets, and they often do so with leverage and through convoluted means, some using the same stockpiles of copper or iron ore as collateral. As per an unofficial estimate, as much as 70 per cent of China’s imports of refined copper were used to obtain financing rather than for consumption. This circle of imports - financing – imports has distorted the picture of copper consumption in China, the world’s largest consumer, and led to a fictitious demand inflation scenario amidst increased cases of multiple funding on same stock. If such incidents do come to light, China’s imports of copper could fall and that would enable the global market to get a better picture of true demand for the metal in the country.

The recent development in Greece has further strained the already weak sentiment in the industrial metal market and it fell sharply as Greece’s vote against austerity. At a referendum ending at noon Eastern Time on 5th July, Greece rejected an austerity package that European leaders insisted that the country implement in exchange for continued financial assistance. With 90 percent of the vote tallied, 61 percent of voters rejected the European program. The current situation as also likely new developments are likely to plummet demand, inflation would soar into the double digits, imports such as food and oil might need to be rationed, companies that borrowed in euros might go bankrupt, and the government would have to balance its budget overnight. Should Greece exit the euro -- temporarily or more permanently -- there’s nothing to prevent the IMF (and Brussels) to come up with assistance programs much as it has done in the past for Argentina. It’s just a matter of time, till Greece decides its next move, till then the global economic and the copper market (as perhaps other metal markets too) would continue to feel the cold of economic uncertainty.

Notwithstanding the above, despite the negativity being present in the copper market, many events are unfolding which are supporting the long term stable to bullish trend in copper prices. Copper is widely regarded by investors as an unrivalled barometer of the state of the global economy because of its use across manufacturing and heavy industry. Copper’s fortunes depend not only on demand from China, even though that nation is the world’s largest consumer, accounting for 42 per cent of global trade. The red metal is also crucial input product for build-out of the electricity grid, as well as wiring used in cars and consumer goods. Producers also hope that copper will have a future in electric cars, wind turbines and high-efficiency power transformers. Another plus for copper could come from shrinking supplies of high quality concentrate in the first half of this year, due to increased mine outages and flooding in Chile. Based on these facts, one can expect that any further supply side problems will only support copper prices, even if Chinese demand weakens further.

In 2014, for the first time in four decades, the global economy grew along with energy demand without an increase in global carbon emissions. According to energy policy group REN21’s just-released Renewables 2015 Global Status Report, which attributes this stabilization to increased penetration of renewable energy and to improvements in energy efficiency. What this means is that as the world’s population continues to grow, and as more people in developing and emerging countries gain access to electricity, the role alternative energy sources such as wind, solar and geothermal play should skyrocket. Between now and 2040, a massive $8 trillion will be spent globally on renewables, about two thirds of all energy spending, New Energy Finance. Solar power alone is expected to draw $3.7 trillion. This is very positive news indeed for the metal which is necessary for the conduction of electricity in all energy technologies, whether they be traditional or alternative. The use of some carbon-emitting fossil fuels—coal, for instance—will likely drop off over the years, but copper will remain an irreplaceable component in our ever-expanding energy needs.

Currently, global copper consumption is poised to increase not just because electricity demand is growing, but also because the new energy technologies typically require more of the red metal than traditional sources. Each megawatt of wind power capacity, for instance, uses an average of 3.6 MT of copper. Electric trolleys, buses and subway cars use about 2,300 pounds of copper apiece. Where we’ll see the most significant growth, though, is in the production of hybrid and electric cars, which use two to three times more copper than internal combustion engines.

At present about 60 per cent of the copper China purchases goes toward the property sector, an area that’s finally starting to show signs of life after almost a year of falling prices. A bright spot for copper demand, however, is the Eurozone, whose own flash PMI (Purchasing Manager’s Index) hit a 49-month high of 54.1. The expansion was led by Germany and France, which saw output rising at its sharpest rate since August 2011. The Eurozone PMI is typically based on approximately 85 per cent – 90 per cent of total PMI survey responses each month and is designed to provide an accurate advance indication of the final PMI data. In the coming years, more and more people all over the globe will gain access to electricity, a growing percentage of which we will derive from renewable sources. More electricity would certainly lead to increased demand for copper and other base metals.

Surplus Supplies & Shrinking Demand Taking Its Toll

Copper prices, seen as a barometer of industrial demand around the world, has plunged to its new lows in recent times as fears grew large over the health of the global economy. Copper has been the under performer in the base metals complex since the beginning of 2014 and affected by the supply balances from deficits to surpluses. Investors were panicked into selling after the World Bank raised fresh concerns about the health of the global economy, cutting its growth forecasts for this year and next and warning that the Eurozone Economy could be facing permanent stagnation. Copper is now in the midst of its longest run of losses for the year, and is dragging other commodities as aluminum, lead, zinc, nickel and iron ore on the lower side.

The question of surplus – whether there will be one – in the copper market is very much up in the air this year. Both Reuters’ GFMS and the International Copper Study Group (ICSG) see a surplus around 400,000 tonnes in the making for 2015, but key factor driving this alternate view of a tighter copper market – one close to balance – is that operational disruptions have already affected supply substantially in 2015. Above all estimates, Glencore went far enough to predict a 1.6 million MT, deficit in 2015.

On the production side, as per ICSG, World mine production estimated to have increased by around 2 per cent (65,000 MT) in the first two months of 2015 compared with production in the same period of 2014. Concentrate production increased by 2 per cent while solvent extraction-electrowinning (SX-EW) increased by 4 per cent. The increase in world mine production was mainly due to recovery in production in Indonesia and Chile, although the latter also benefited from production at mines that started last year. Production in Peru and the United States declined by 6 per cent and 3 per cent respectively.

World refined production estimated to have increased by around 5 per cent (170,000 MT) in the first two months of 2015 compared with refined production in the same period of 2014: primary production was up by 3 per cent and secondary production (from scrap) was up by 13 per cent. The main contributor to growth was China (9 per cent), followed by the Philippines, Indonesia and the DRC where aggregated production has increased by 48 per cent (67,000 MT). Output in Chile, the second leading refined copper producer, declined by 2 per cent, and in the United States production declined by 7 per cent.

In the first two months of 2015, world apparent usage estimated to have declined by around 3.5 per cent (130,000 MT) compared with that in the same period of 2014. Chinese apparent demand declined by 5 per cent (90,000 MT) based on a 26 per cent decrease in net imports of refined copper from the high net import level in early 2014 and consequently higher apparent usage. Excluding China, world usage declined by around 2 per cent mainly due to a decline of 42 per cent in Russia’s apparent usage (following the withdrawal of Russia’s cathode export tax in September 2014) and a decline of 7 per cent in EU usage.

China’s bonded stocks remained unchanged in the first two months of 2015 from the yearend 2014 level. Stocks increased by around 120,000 MT in the same period of 2014. In the first two months of 2015, the world refined copper balance adjusted for the change in Chinese bonded stocks indicates a production surplus of around 153,000 MT compared with a deficit of around 28,000 MT in the same period of 2014.

Manufacturing activity showed few signs of picking up across Europe, Asia or the Americas last month as demand stayed stubbornly weak, highlighting the need for central banks to continue supporting economic growth. Copper prices could draw further support if mining conflicts in Peru, a top global minerals exporter, heat up ahead of presidential and congressional elections next year as political outsiders whip up anti-mining sentiment. But, given the absence of major supply disruptions in May, Barclays sees a surplus of 48,000 MT for 2015.

China continues to be crucial to the whole picture, accounting for about 45 per cent of global demand for copper as the metal’s wide range of uses for wiring, piping and in general industry make it essential to an economy where infrastructure is expanding. Although China is still growing fast compared with advanced nations such as Britain and US, growth is nevertheless slowing and fears of a hard landing remain. Growth last year expected to have been less than 7.5 per cent, missing Beijing’s target for the first time since 1998.

The current demand scenario for Chinese demand is showing signs of improvement, as there are strong orders for copper in China by cable makers and for power grid investment. China’s copper demand to grow by 4 per cent this year on considerable use in power grid investment, based on announced government spending plans. The seasonally strongest quarter for copper demand in China is passing its peak with factories eyeing a summer production slowdown, leading to expectations for lower metal consumption. One of the hurdles facing industrial companies in China is a dearth of credit, with banks, burnt by last year's commodity financing scandal, reconsidering their businesses. The continued weakness in Chinese data, combined with the strong dollar rally of the last six months, have together hurt copper. This has created buying opportunities for copper, which also has the best long-term fundamentals in the industrial metals space, given grade declines, delayed new mines, and advantage to the growing electrification of the emerging world.

The other supportive factor for the price is the speculation that the Federal Reserve is likely to wait longer to raise interest rates amid mixed economic data. The dollar also headed for the biggest drop in 10 weeks against a basket of 10 currencies, boosting the appeal of commodities as an investment. Also weighing on oil, copper and other commodity prices is a strong dollar. When the dollar is strong, the price of dollar-denominated commodities such as oil and copper tend to fall, because they are globally traded and are more expensive for holders of foreign currencies. In the wider markets, a persistent sell-off in bond markets left financial market confidence in short supply, with stocks lower globally; while oil prices slipped ahead of Friday's OPEC meeting, prolonging the weakness in the copper market. Overall, we can say that the current drop in the copper prices is mainly due to investor’s panic rather than a sudden deterioration in fundamentals and can change in a very short span.  

The Indian copper market is also experiencing the pressure of the global uncertainty as the major copper scrap commodities prices showed a negative trend on Scrap Register Price Index. India's major copper scrap commodities like copper mixed scrap, copper pat, copper super d. rod, copper utensil scrap and copper wire scrap are all pointing southward. In spite of the weak short-term fundamentals, the copper market is likely to maintain its long-term bullishness as the automobile, power and infrastructure sector in India, which is poised to grow exponentially and I feel that this is one of the strong factors to motivate the investors to invest in copper with long-term horizon.

Indian Monsoon Likely to Head for Major Disruptions amidst Strong El Niño

Introduction

The contribution of agriculture in GDP is on consistent decline; it has shrunk from over 25.80 per cent in 1996 to about 16.96 per cent in 2014 and is further expected to decline because of the lack of focus on agriculture. This share is on consistent decline owing to lack of focus on agriculture over the years and shrinking economic support. Indian agriculture still continues to real under the shadow of monsoon. The lack of irrigation facilities continues to pressure the Indian agriculture even after 62 years of independence, since only 48.3 per cent of sown agricultural land is irrigated. The land of the country is thus under tremendous pressure to feed over a billion population and provide employment to about 65 per cent of the total work force. It is therefore very necessary that the monsoon should commence on proper time and precipitation should be in adequate amount.

Indian agriculture is facing increased pressure on account of consistent population growth (Annual 1.53 per cent) and its extensive reliability on monsoon rains. For farmers, it is highly critical to know when the onset will occur as this affects the timing of the planting of crops. If rainfall is deficient then more than two-thirds of the seedlings can die. To prevent this, the prediction systems play a very important role. Rain is critical as two-thirds of the population depends on farm income and nearly 60 per cent of summer-sown areas do not have assured irrigation. Kharif crops account for nearly half of India’s food output, including rice, lentils, sugar, spices, mangoes and oilseeds.  The country is already reeling under a series of unseasonal rain and hailstorms that has damaged crops in 16 per cent of total area sown in the winter.

El Niño is a 'warm' ocean current originating along the coast of Peru that replaces the usual 'cold' Peru or Humboldt Current. This warm surface water reaching towards the coast of Peru with El Niño are pushed westwards by the trade winds thereby raising the temperature of the Southern Pacific Ocean. A reverse condition is known as La Niña. Southern Oscillation, a phenomenon first observed by Sir Gilbert Thomas Walker Director-General of Observatories in India, refers to the seesaw relationship of atmospheric pressures between Tahiti and Darwin, Australia.

El Nino has been in news for long time because IMD, RBI and Economists warning about its negative impact on Indian agriculture and Indian Economy.

Basic understanding on El Nino / La Nina

During normal year two things are “STRONG”

•             Cold Peru Current

•             Trade Winds

As a result, cold water is dragged from Peru towards Australia as shown in the following image. Owing to the above current & trade winds two cycles are created as given in the table below the image. In above image, the red (warm) water region around Australia is called Western Pacific Pool (WPP). In the years of La Nina the above two currents become more pronounced and it results in more rains and even floods in Australia and South East Asian Countries and also results over supply of fishes in Peru region.

During the El Nino the above currents (Cold Peru Current & Trade Winds) become weak. As result, cold water is not dragged from Peru to Australia. But reverse happens – warm water is dragged from Australia towards Peru. Consequently, warm water + low pressure condition develops in the Eastern Pacific (Peru) and Cold condition + high pressure in Western Pacific (Australia).

Since Pressure is inversely related with amount of rainfall, the results are following:

•Warming of Pacific Ocean near Western coast of Peru and Ecuador. It Occurs @every 3-4 years; [In theory, it should occur @every 12 years]

•Its impact usually lasts for 9-12-18-24 months.

•It weakens the trade winds and changes in Southern Oscillation, thereby affects the rainfall pattern across the world.

Effect of the development in the Pacific Ocean results in the weakening of the trade winds and changes in Southern Oscillation, thereby affects the rainfall pattern.

Impact of Southern Oscillation

El Nino-Southern Oscillation (ENSO) water circulation happens between Australia and Peru But the wind movement is part of larger atmospheric circulation hence affects the rainfall over India. El Niño years directly impact India’s agrarian economy as their effect tends to lower the production of summer crops such as rice, sugarcane and oilseeds. This in return causes inflation to surge and lowers the Gross Domestic Product (GDP). India is the second largest producer of rice and wheat in the world.

How does it affect India and World?

India

• Drought condition decreases the agriculture output, leads to food inflation.
• Declined supply of cotton, oilseeds and sugarcane negatively affects the textile, edible oil and food processing industries respectively.

World

• Drought situation over South East Asia and Australia hurts rice and wheat cultivation respectively.
• Warm condition over Peru coast: unsuitable for Plankton population, thus bad for fishing industry. Birds migrate in search of fishes, thus less guano dropping for Fertilizer industry in Peru and Ecuador.
• Flood situation in South America & US Midwest lead to decline in coffee-cocoa and corn-wheat production respectively.

El Nino Phenomenon in India

According to Historical data of 126 years (1880-2005), about 90 per cent of all evolving El Niño years have led to below normal rainfall and 65 per cent of evolving El Niño years has brought droughts. However, one thing is clear that El Niño years do affect the weather in India in terms of Monsoon rain. During this time, the rainfall is generally below normal, which has its bearing on crop production. Here is a list of droughts taken place in India in last two centuries. Some of these have been an outcome of the El Niño phenomenon.

Latest Developments

The effect of monsoon rains in the food grains output of the country can be clearly seen from the above table and figure. The monsoon in year 2014 was almost 88.00 per cent to the normal monsoon in 2014-15 and most of the crops exceeded their estimated targets of production and as a result we received a record food grain production of above 250 million MT. The monsoon was declared as failure in the year 2012 by the central government and the effect of deficient monsoon is clearly visible for the gap between the target and the expected production levels in major crops. Since similar situation in the monsoon is expected in the recent times, there are ample reasons for us to fear for the lower production. The pre-monsoon development of the current year is closely in lines with the situation in 2009 & 2012, where the western disturbance has been stronger than other years.

Major Statistics of Foodgrain Production and Stocks

In the above figure, an attempt has been made to find the link between the total foodgrains production, the percentage of irrigated land and the stocks in hand of the government to cope up with the adverse climatic/ production scenario. The data represented in the above graph is between 1976 and 2014. The Red Ovals in the plot marks the drought year (as declared by All India Summer Monsoon Rainfall, Department of Agriculture & Cooperation, Ministry of Agriculture, and Government of India). The Identified drought years are 1979, 1982, 1986, 1987, 2002, 2004, 2009, 2012 and 2014 (Partial). In almost all the drought years the production of foodgrains had come down. The percentage irrigated land in the country is almost constant (about 46.4 per cent) for the last 12 to 15 years. The foodgrains stocks in the hand of the government has also shown declining trend in the corresponding draught years.

The status of the foodgrain production in the drought years in comparison to the preceding normal year on monsoon is shown in the following table.

From the above table it can be inferred that the production of foodgrains has declined in the drought year. The growth of the irrigated area has been evenly paced with marginal dips in the drought years. The pressure has been noticed in case of the procurement of foodgrains by the government agencies which have declined in almost every drought. The major reason identified for the drought in the country between 1979- 2002 is been the El-Nino (the basic description of which has been given in the earlier text). Important geological facts regarding Indian drought has been mentioned in the following text box which we feel is of prime importance if we have to discuss the overall performance of the agriculture sector. 

The pattern and the progress of monsoon and its comparison to the total foodgrain production over the years in the country could be analyzed from the following figure.

Progress of Foodgrain Production & Developments in Monsoon Rain Distribution

Impact of Monsoon on Indian Economy

A good monsoon helps drive up rural spending on goods, such as gold and consumer durables, boosting manufacturing and economic activity. When rain dependent farm output is robust, rural spending goes up on major consumer durables. This creates demand for the manufactured goods, which in turn helps the general economy. On the reverse side, if the monsoon is inadequate, it puts pressure on the country’s economy as government has to borrow more in order to mitigate the effect of drought and to support the farmers’ income.

Major development in Climate Changes which has raised concerns over 2015-16 Monsoon

• The Australian Commonwealth Bureau of Meteorology's Southern Oscillation Index (SOI) dropped to -11.2 in March from 0.6 in February. A sustained SOI reading below -8 indicates El Nino conditions. The bureau has raised the possibility of El Nino conditions developing this year to at least 70 percent from 50 percent earlier (declared in March).
• Nomura (Japanese brokerage firm) has also stated that the El Nino risks for this year is rising in India and it could result in sub-par rains, hurting rural demand and food inflation in the country. As per Nomura, a third consecutive bad agricultural season could severely impact rural incomes in India, force the government to announce higher Minimum Support Prices and possibly push food inflation temporarily higher.
• We are already into an El Nino phase as reported by Damodar S Pai, lead monsoon forecaster at India Meteorological Department.
• The chances of El Nino occurring in 2015 have increased. Ocean temperatures in the tropical Pacific continue to be warmer than average, trade winds remain weaker than average, and all models surveyed suggest further ocean warming will occur.
• Ocean temperatures in the tropical Pacific continue to be warmer than average, trade winds remain weaker than average, and all models surveyed suggest further ocean warming likely to continue.
• The US National Oceanic and Atmospheric Administration have also predicted the likelihood of an El Nino event this year with at least a 70 per cent chance.
• The month of March was also ranked warmest by NCDC in a record dating back 136 years. The Japan Meteorological Agency concurs, whereas NASA, which does its own independent analysis, ranked March as third warmest.
• On April 9, the National Oceanic and Atmospheric Administration (NOAA) officially declared a strong El Niño advisory reflecting substantially above-average surface sea temperatures forming across the equatorial Pacific. This means that there is a 60 to 70 percent probability that America could experience a monster winter like the El Niño that hit in 1997-1998, causing torrential rains in the Southeast, ice storms in the Northeast, tornadoes in Florida, and mass flooding in California.
• NOAA emphasized that their El Niño forecast is supported by the increase in subsurface temperatures, enhanced convection over the Date Line, and the increased persistence of low-level westerly wind anomalies which has caused wide spread rains in India in the last couple of months.
• El Niño brings areas of low pressure and increased rainfall to the west coasts of North and South America (including California), according to Columbia University’s Earth Institute.
• Normally, the trade winds along the equator blow in the opposite direction. This helps bottle up warm surface waters in the western part of the tropical Pacific. But here, they’ve reversed, helping warm water to flow toward the east which confirms the presence of El Niño.

The food production trend over the years have been upside barring few down’s due to weather woes, which is positive for the country. The major slump in the production was seen in 2002-03 which was a severe drought year. The same trend was noticed for the year 2009-10. The point of concern is the distribution of rainfall. From the above figure it is evident that the number of districts with normal to excess rainfall is declining as the years are passing. If the same trend continues for another decade or so the threat of drought occurring in the country would increase immensely and hence only 46.4 per cent of the total cultivated area has good irrigation facilities, the Indian agriculture may be heading towards much stiffer challenges. 

Copper Feels the Heat of Chinese Dilemma

The world market is now looking closely at India for signs of a strong pickup in demand. Higher investments in power generation as envisaged in the recent Budget 2015-16 are seen as positive signals for an uptick in demand. Although for the present Indian consumption is way below that of China’s, in the next couple of years, demand growth is set to gather pace with policy emphasis and higher outlay for power generation and infrastructure sector. Copper is an essential industrial metal used worldwide with in construction and because of its electrical properties. Copper prices are widely followed in the commodity sector and are followed in financial markets around the globe. Copper mined in open mines around the world, with Chile and the United States leading in overall copper production. The demand for copper is increasing on account underlying growth in countries such as China and India even while the supply remains tight. The growing demand and constrained supply is likely to keep copper prices volatile in the near future.

The supply side of copper continues to be robust and the global market expected to spend the calendar year 2015 as a year of surplus supplies. The development in the mining sector has been significant. Adding support to the price is the closure of World’s third largest copper mine in Indonesia owing to labour disputes. The recent torrential rains and power outage in parts of Chile have disrupted mining operations in the Atacama Desert region which is home to over half of Chile’s copper mines and accounts for close to two-third of national production. Chile accounts for close to 6 million MT of mined copper output annually, which is nearly a third of the global output. Disruption to communication lines has exacerbated the situation. According to experts, one week’s disruption would mean loss of 70,000 MT output. 

Apart from details of Chile and Indonesia, global mine production is estimated to have increased by around 1.3 per cent (233,000 MT) to 18.3 million MT in 2014 compared with that in 2013. Concentrate production has increased by 1 per cent to 125,000 MT while concentrate by solvent extraction electro-winning process increased by 2.8 per cent to 108,000 MT. In 2014 production remained essentially unchanged in Chile and in Peru - the 1st and 3rd world biggest copper mine producers - and it declined by 26 per cent in Indonesia, where production through August remained constrained by the ban on concentrates exports; by 7 per cent in Zambia owing to an operational failure at the Lumwana mine and lower production at other mines; by 3 per cent in Australia owing to the temporary closure of two mines and by 28 per cent in Papua New Guinea, where the Tedi mine was constrained by a landslide and heavy rains. However, production increased by 8 per cent in the United States, 8 per cent in the Democratic Republic of Congo (DRC), 7 per cent in Mexico, 10 per cent in Canada, 8 per cent in Brazil and 34 per cent in Mongolia. 

China is crucial to the whole picture and accounts for about 45 per cent of global demand for copper. The metal’s wide ranges of uses for wiring, piping and in general industry make it essential for developing economies, where focus continues on infrastructure growth. Although China is still growing faster than industrialized nations such as Britain and US, its growth is nevertheless slowing and fears of a hard landing remain. Growth last year is expected to have been less than 7.5 per cent, missing Beijing’s target for the first time since 1998. In spite of missing the growth target the demand for copper is not likely to shrink by major quantum, as the scale of operation in China is too huge compared to other demanding countries. China still continues to import copper from world market, though with reduced aggression and this is one of the major reasons that China continues to be the centre points of all global activity concerning copper. 

China’s copper imports in February tumbled by the most in four years. China’s imports of scrap copper, the feedstock for one-third of the country’s production of the metal, are unlikely to rebound from a 10-year low as U.S. supplies remain tight. Industries that provide the bulk of recycled material in the U.S., the biggest exporter of scrap metal to China, have not yet recovered sufficiently to improve supply. Scrap copper imports by the country, which accounts for about half the world’s copper consumption, fell to the least since 2004 last year as the economy expanded at the slowest pace since 1990. Scrap metal is the feed-stock for about one third of China’s copper production.

China's economy is growing at its slowest pace in 24 years in 2014 as property prices have cooled and companies and local governments are struggling under heavy debt burdens, keeping pressure on Beijing to take aggressive steps to avoid a sharper downturn. End-users in China, the world's top consumer and producer of refined copper, typically increase purchases around the second quarter to support higher production as the summer approaches in anticipation of some aggressive support from the government. 

A weaker U.S. currency makes dollar-denominated assets such as metals cheaper for buyers holding other currencies. The sentiments were also boosted on back of the expectations that China would continue with the initiative of building infrastructure, thereby increasing its demand for copper. The other supporting news in the market is the activity in China's factory sector that has dipped to 11 month low in March 2015, is signalling persistent weakness in the world's second-largest economy. This is ringing more alarming bells for its Central Bank to come up with yet another stimulus programme, which is supportive for the industrial metals, especially copper. Away from China, the U.S. recovery has been gathering pace, with the country likely to want more red metal and the fresh stimulus announced by the ECB is turning out to be an aid of the last resort for the Eurozone economies.

As reported in the above text the refined copper market is likely to have supply surplus for the whole of 2015 as the mini-boom in the copper mining industry continues. LME inventories remain at their lowest levels, but we shouldn’t pay attention to this since inventories have been falling with prices since their peak in mid-2013. Copper’s plunge mirrors losses across commodities as a decade-long bull market led companies to boost production and the Federal Reserve debates when to raise interest rates. Because copper lacks strong fundamentals, we wouldn’t expect copper to make significant moves upward but at the same time a significant plunge in the prices from current levels is not expected. Amidst growing uncertainties the copper market is trying to find new equilibrium in between the lows. In spite of the slowdown is Chinese economy, it is likely to consume 4.9 per cent more copper than last year. We feel that as the crude oil (WTI) stabilises in the range of USD 55-65 per barrel in couple of months’ time, the copper would find its next equilibrium and the tend to move northward from there. Thus, we feel that the uptrend in copper would start towards end of 2nd quarter of 2015.

2nd Rabi Crop Estimates for 2014-15

Unseasonal rain and hailstorms have hit standing crops across North and West India. Officials have estimated major damage to the rabi crop thereby affecting the harvest such as cereals, oilseeds and pulses. The main states hit by the adverse weather are Punjab, Rajasthan, Haryana, Uttar Pradesh, Maharashtra, Gujarat and Madhya Pradesh. As per the recent assessments by various agencies wheat crop has been severely affected in Punjab, Haryana, Uttar Pradesh and Madhya Pradesh. Apart from wheat, major losses in RM Seed in the states of Madhya Pradesh, Punjab and Haryana has also been feared. Reports of loss in chana is been reported from Madhya Pradesh, Rajasthan and Maharashtra. 

We in our first estimate (1st Rabi Crop Estimates for 2014-15 – Dated: 12th February 2015) had already lowered the crop size for major crops over 2013-14, but the recent heavy rains and hail storms in the major rabi crop growing areas has led us to reassess the situation further. With reports of increased incidence of water logging in wheat fields in Punjab, Haryana, Uttar Pradesh the total production is set to decline further to ­­­­­86.43 million MT from earlier estimate of 92.14 million MT (a drop of 9.89 per cent over last year). Rabi Maize total production is set to decline by 16.55 per cent over last year. The barley production in Rajasthan and other parts of the country is set to decline by 8.15 per cent over last year. Overall, the total Rabi Cereals production is likely to decline by 17.19 per cent over last year. 

In the pulses sector, the Chana (Chickpea) is expected to be most affected by the lack of residual soil moisture in major growing areas. We expect the production of Chana to decline by 26.01 per cent to 7.31 million MT over last year. Overall, the total Rabi Pulses production is likely to decline by 19.11 per cent over last year.

The oil seed sector is likely to see a decline of production by 22.17 per cent. Major decline of 25.75 per cent in production is expected in case of RM Seed over last year. 

Based on the above reports and feedback from the Industry / Traders we have revised our Rabi crop estimates for upcoming season as:

Bull Align for Heavy Beating in Copper

Copper prices, seen as a barometer of industrial demand around the world, plunged to a five-and-a-half low as fears grew over the health of the global economy. The red metal is the latest commodity to suffer in the wake of a collapse in the price of oil amid deteriorating sentiment over the global economy as the World Bank cut its forecast for global growth in 2015 to 3 per cent from an earlier figure of 3.4 per cent. 

The global market is currently feeling the heat of the abundance of copper. World refined production is estimated to have increased by around 8 per cent (1.5 Mt) in the first ten months of 2014 compared with refined production in the same period of 2013 - primary production increased by 8 per cent (including 9 per cent growth in production from concentrates), and secondary production (from scrap) increased by 11 per cent. The main contributor to growth was China (19 per cent, 1 Mt), followed by India, the DRC, the United States and Japan, where aggregated production increased by 14 per cent (430,000 t). Output in Chile, the second leading world refined copper producer, declined by 1 per cent owing to a 5 per cent decline in electrowon production. On a regional basis, refined production is estimated to have increased in Africa (8 per cent), North America (9 per cent), Asia (13 per cent), Europe (3 per cent), and Oceania (12 per cent) and to have declined in South America (-1 per cent). The average world refinery capacity utilization rate for the first ten months of 2014 increased to 83 per cent from 79 per cent in the same period of 2013. Based on existing facilities and announced project developments, annual copper mine production capacity until 2018 is expected to grow at an average rate of around 6 per cent per year ( per cent/yr) to reach 27.6 million metric tonnes per year (Mt/yr) in 2018, an increase of around 5.8 Mt (27 per cent) from that in 2014. Concentrates production capacity will represent 83 per cent of the growth (4.8 Mt) and SX-EW capacity 17 per cent (1 Mt).

The refined copper balance for the first ten months of 2014, including revisions to data previously presented, indicates a production deficit of 616,000 t (a seasonally adjusted deficit of 532,000 t). This compares with a production deficit of 159,000 t (a seasonally adjusted deficit of 56,000 t) for the same period of 2013. In the first ten months of 2014, world usage is estimated to have increased by around 11 per cent ([1.9 Million tons (Mt)] compared with that in the same period of 2013, supported by strong demand in China and a shortage of high-grade scrap that led to the use of more cathode by semi-manufacturers.

Industrial metals have been reeling under tremendous pressure since the beginning of this year. Prices of metals have been weighed down by several factors, including the downward revision of the global growth forecast by the International Monetary Fund (IMF), ongoing sluggishness in the Chinese economy and the tumult in oil market, which has raised deflationary concerns.

Copper is now in the midst of its longest run of losses for a year, and dragged other commodities lower. Lead fell to a 30-month low, nickel was down at an 11-month low, zinc and aluminum fell and spot iron ore prices were close to their lowest level in more than five years. China is crucial to the whole picture, accounting for about 45 per cent of global demand for copper as the metal’s wide range of uses for wiring, piping and in general industry make it essential to an economy where infrastructure is expanding. Although China is still growing fast compared with advanced nations such as Britain and US, growth is nevertheless slowing and fears of a hard landing remain. Growth last year is expected to have been less than 7.5 per cent, missing Beijing’s target for the first time since 1998. 

The major factors affecting the price of copper are – further dollar strength, commodity price deflation, China’s shift to a new normal (tight credit, slowing growth), weakening copper intensive construction completions growth, and above trend supply growth.

Unlike oil, which is in plentiful supply, the supply of copper is considered relatively tight. Although analysts are predicting a small surplus of copper this year, they expect a deficit for 2016 suggesting the fall in the copper price is driven more by worries over global growth than any supply glut. Also weighing on oil, copper and other commodity prices is a strong dollar. When the dollar is strong, the price of dollar-denominated commodities such as oil and copper tend to fall, because they are globally traded and are more expensive for holders of foreign currencies. 

On the demand side, China runs a structural copper deficit, with refined consumption of around 8.8 million MT and refined production of around 5.6 million MT; it seems unlikely that much of the Chinese stockpile will leave the country. Asia is accounting for 87 per cent of the increase in capacity – the China, India, Indonesia and Iran totals with all increase. Chinese apparent demand increased by 18 per cent (+1.4 Mt) based on an 18 per cent increase in net imports of refined copper. Excluding China, world usage increased by 5 per cent, supported mainly by apparent usage growth of 11 per cent in the European Union and 10 per cent in Japan, as well as by growth of 6.5 per cent in other Asian countries (excluding China and Japan) and 10 per cent in the Middle East/North Africa region. Usage in the United States remained flat.

More on the positive side, despite weakness in the Chinese housing sector, copper demand rose in the second half of the year in China. According to data provided by the General Administration of Customs, inbound shipments of both unwrought and fabricated copper increased by 7.4% to 4.83 million tons in 2014. The numbers are significant because the Chinese GDP growth rate of 7.4% last year was the weakest since 1990. Still, the growth rate was better than expectations. It shows that although slow, the Chinese economy is chugging along thanks to the People's Bank of China's economic stimulating efforts.

In late 2013 and early 2014, optimism was running high that the US economic recovery would continue and that China would move into recovery mode too. On the strength of that, metal prices ran higher while investment interest picked up. Although US data has tended to remain upbeat, Chinese data has been less constructive and a recovery in demand during the first quarter has proved to be elusive. This forced a reappraisal of the outlook for commodity demand and a corresponding correction in prices. Copper has had some of the tightest fundamentals of all the metals in recent years, which is no doubt why prices have managed to hold so far above the marginal cost of production. On paper, the market looks set to move into a supply surplus in 2013, which should in theory put downward pressure on prices; indeed, that seems to have been unfolding in recent months.