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Volatility impacts copper

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Last year was a turbulent time for the copper industry with both labor disputes and government restrictions on ore and mineral exports impacting upon the metal’s supply chain. The effect of those problems helped to push prices above $7,000 per tonne towards the end of the year. Throughout the first quarter of this year, the price has fluctuated between a high of $7,180 (Copper settlement LME daily official per tonne) on January 15 and a low of $6,500 on March 26.

However, is the trend of supply disruptions and higher prices set to continue? Writing in INTL FCStone’s April issue of Monthly Market Overview, Edward Meir says: “Copper has been hammered by trade concerns, but also by the fact that labor negotiations are being settled swiftly and ahead of schedule. Nevertheless, although the extent of the projected disruptions has eased, we still have important negotiations (Escondida and Grasberg) to get through.”

The International Copper Study Group (ICSG) reported just how much impact the disruptions in 2017 had had when it reported in March that “World mine production is estimated to have declined by around 2% in 2017, with concentrate production declining by 1.6% and solvent extraction-electrowinning (SX-EW) by 3%.” The ICSG report then also noted that labor disputes at mines, particularly at the Escondida mine in Chile, caused a 1% decline in output from the country acknowledged as the world’s largest producer of mined copper.

Further constraints on supply reported by ICSG included a 12.5% decrease in Indonesian concentrate production, which resulted from a temporary ban on concentrate exports put in place by the country’s government at the start of January 2017 and continued until the end of April that year.

The ICSG report also outlined a global refined copper deficit of 163,000 tonnes. This figure was revised upwards from a previously published deficit of 150,000 tonnes. While some of this figure may be directly attributable to concentrate supply issues arising from last year’s labor disputes and export bans, there is also a background of major producers not investing in new production leading to a slowing down of mine production. Writing in the January 2018 Copper Spotlight from Fastmarkets, analyst William Adams notes that “mine supply shortages are expected to develop over the next three years as a result of restrained capital expenditure between 2012 and 2015.”

Mine development
The potential lack of development in copper mining has been echoed by analysts from BMO Capital Markets, who said in the BMO Global Commodities Research paper, published April 5, 2018: “There is general agreement that the lack of copper supply growth will lead to a refined market deficit over the coming years.” Explaining the reason for the lack of growth, the BMO Capital Markets report states: “After delivery of [First Quantum Minerals’ Panama copper mine] Cobre Panama (with the main ramp early next year) we are left with a gap until we see the next batch of 200,000 tonnes per year-plus projects in 2022-23.”

The BMO report also explains that that is the time frame when projects such as Ivanhoe Mines’ Kamoa-Kakula copper project, Oyu Tolgoi Phase 2 (by Rio Tinto), and Teck’s Quebrada Blanca Phase 2 will provide meaningful copper supply growth.
On current mined ore availability, the BMO report says: “The copper pipeline is the lowest, both in terms of number and capacity of projects, seen thus far this century.”

Daniel Briesemann, an analyst with Commerzbank, notes that while there is a potentially large deficit that may change over the coming year as miners react to higher prices and increase production. “In late October, the ICSG estimated that mine production will rise by 2.5% in 2018. I think this is due to the high prices which give the miners an incentive to expand production,” Briesemann says.

He explains that expanded production will come from Chile (where production should recover from a six-year low following strike-related outages), Peru (where existing mines are to be expanded), and Zambia and the Democratic Republic of Congo (where previously idled capacities are to go back into operation).

Briesemann cautions, however, that “there might be some risks to this forecast because many collective wage agreements need to be renegotiated in Chile. However, the outages in copper mining production that had been feared as a result of possible strikes in Chile have failed to materialize so far.”

The analysts at BMO take a similarly positive view of potential recovery of production in Chile’s copper mines in the near future, stating in the BMO research paper that: “At greater-than 300,000 tonnes Escondida’s planned output recovery in 2018 will be the second largest year-on-year gain by a single operation in recent copper history, after Las Bambas in 2016.”

Chinese consumption
Regardless of where primary material production increases come from, China is set to continue as the dominant consumer of copper ore this year. Looking back on 2017, the ICSG reported that China was the main contributor to growth in world refined copper production with an increase of 5%. It also noted that “Chinese apparent usage (excluding changes in unreported stocks) increased by 0.9% as, although refined copper production increased by 5%, net imports of refined copper declined by 9.5%.” Increased usage of copper was also reported in India and Japan, but there were declines in the United States, Germany and South Korea.

In its Short-Term Forecast for Copper (released in November 2017) the International Wrought Copper Council (IWCC) predicted increased demand from China too. “For 2018, the forecasts currently suggest reported demand in China might be 11.62 million tonnes, up 3.0% compared with 2017.” The IWCC saw a similar increase taking place last November in Japan, too, stating: "The latest forecasts for Japan suggest that refined copper demand in 2017 might increase by 3.1% to 1.002 million tonnes, with a further increase of 1.0% expected for 2018 taking demand in that year to an expected 1.012 million tonnes.”

Addressing China’s demand for refined copper, Briesemann says: “According to the Chinese research institute Antaike, Chinese copper demand grew by 4.2% last year. This year, copper demand is set to rise by 3.34% to 11.1 million tons, the main driver being the power sector. The housing sector and new energy vehicles are also expected to contribute to the increased demand for copper.”

On India, Briesemann says: “It is well-known that India has the potential catch-up with China. However, in China itself there is still the need to invest heavily in infrastructure. And just consider the mammoth ‘Belt-and-Road’ initiative. Hundreds or even thousands of projects will be implemented and mainly financed by China. The initiative requires a lot of commodities in the long-term and copper is definitely part of it.”

The current political situation driven by US President Trump and the tariffs being applied to metals by the US government could impact upon Chinese demand. Meir wrote in INTL FCStone's April overview: “For 2018, prices are off 7.4%, not exactly an auspicious start to the year. Several reasons are behind the decline, the most prominent being the Section 232 tariffs.” Meir also noted that on March 22 and 23, markets were rocked by a new set of announcements whereby the Trump administration said it would impose $50 billion of tariffs on Chinese imports in retaliation for alleged intellectual property theft and other alleged misdeeds.

He notes that “both actions sent a chill through ferrous and non-ferrous complexes, as investors became rightly concerned that the world’s two most powerful economies could get embroiled in an escalating trade war.

China’s recently introduced ban on low-purity scrap imports is another important factor at play in the copper supply chain. China’s Ministry of Environmental Protection (MEP) issued new regulations in mid-December 2017 that set the threshold for impurities allowed in non-ferrous scrap imports, including copper scrap, at 1%. As a result of this change, China’s copper scrap imports fell by 52.4% year-on-year during the first two months of 2018, according to Chinese customs data.

Briesemann does not consider the ban to be having as great an impact as many had predicted: “China’s copper scrap imports as a whole have been on the decline for years anyway so I do not think that the ban will have a significant effect on the market.”
How copper prices react to market changes remains an issue of great speculation and, as Meir says: “Although labor negotiations have progressed, we still are not free and clear, as the biggest contracts still lie ahead.”

Taking all the possible supply issues into account, Briesemann believes that “the copper price will continue to correct and we see the price falling to below $6,500 where it should find a bottom. We see such a level as an attractive hedging opportunity for copper consumers because we expect higher copper prices in the long-term.”

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