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Copper Investment Sentiments Grappled by Coronavirus

Posted on 3rd February 2020 by Dr. Hanish Kumar Sinha, Deputy Vice President - Research & Development, NBHC

The global economic barometer, which was already struggling over the economic uncertainties, fell off the cliff as coronavirus gripped over 30 Chinese provinces forcing announcing of highest level of public health emergency,bringing almost all economic activity from consumption to logistics to staggering low levels. Investors have started deserting raw materials around the world over fears about the economic fallout from the virus. Currently, in the affected region about 90 per cent of copper smelting, 60 per cent of steel production, 65 per cent of oil refining and 40 per cent of coal output have been halted plummeting the overall sentiments in the global copper and other raw material market. Apart from the current medical emergency, the factors that have pressured the market all throughout 2019 are the trade war between US & China, the global manufacturing recession, dipping of manufacturing PMIs in most developed and emerging markets and the mini trade war between Japan and South Korea.

Except for the Medical Emergency in China, things had started to show improvement with the recently announced Phase I of the US and China trade deal, the recent election in the UK, where conservatives had a resounding victory, the passing of United States–Mexico–Canada Agreement (USMCA) and the Fed’s commitment to lower interest rates. Another catalyst will be the planned upgrades by Codelco, the state-owned copper mine in Chile. The company is expected to accelerate these upgrades in 2020 if it gets the much-needed funds from the government. As a result, upgrades could lead to disruptions in its mines. This is important because Codelco is a major copper producer that produced more than 1.81 million MT from its mines.Another supply risk for copper production will be from the Democratic Republic of Congo (DRC).In recent years, political risks in the African country have been increasing this had led Glencore to close down its Mutanda mine.Similar problems are also happening in neighbouring Zambia, which is another important producer. As per analysis,world mine production declined by about 0.3 per cent in the first ten months of 2019, with concentrate production remaining essentially unchanged and solvent extraction-electro-winning (SX-EW) declines by 1 per cent. The reduced output in major producing countries is more than offset growth in other countries. Production in Chile, the world’s biggest copper mine producing country, declined by 0.2 per cent mainly due to lower copper head grades and some production disruptions that occurred early in the year. Indonesian output declined by 47 per cent as a consequence of the transition of the country’s major two mines to different ore zones leading to temporarily reduced output levels. After growth of 13 per cent in 2018, aggregated production in the Democratic Republic of Congo (DRC) and Zambia declined by 3 per cent as consequence of temporary suspensions at SX-EW mines, reductions in planned production and operational constraints. Production in a number of copper mine producing countries, including Australia, China, Mexico, Peru and the United States increased mainly due to a recovery from constrained output in 2018. Panama started producing copper in March 2019, with the commissioning of the Cobre de Panama mine, and was the most significant contributor to world mine production growth over the first ten months of 2019. On a regional basis, mine production is estimated to have increased by around 4 per cent in North America, 1.5 per cent in Latin America and 5 per cent in Oceania but declined by 6 per cent in Asia, 2 per cent in Africa and 2 per cent in Europe.world refined production declined by about 0.3 per cent in the first ten months of 2019 with primary production (electrolytic and electro-winning) falling by 0.7 per cent and secondary production (from scrap) increasing by 1.7 per cent. World refined production growth was constrained as a consequence of a 27 per cent decrease in Chilean electrolytic refined output due to temporary smelter shutdowns whilst undergoing upgrades to comply with new environmental regulations. Total Chilean refined production (including Electro-winning) declined by 10 per cent. A 37 per cent decrease in Zambian refined output due to power supply interruptions, smelter outages and temporary shutdowns and the introduction on 1st January 2019 of a 5 per cent custom duty on copper concentrate imports that constrained smelter feed. Reduced output has been reported in Japan, Peru, the United States and a few European countries due to smelter maintenance shutdowns. However, these reductions were partially offset by growth in Chinese output and by increases in countries recovering from production constraints in 2018 such as Australia, Brazil, Iran and Poland. On a regional basis, refined output is estimated to have increased in Asia (3 per cent) and in Oceania (10 per cent) but declined, in North America (-2 per cent), in Latin America (-7 per cent), in Africa (-9.5 per cent) and in Europe (-2 per cent).

These fundamental factors, in addition to the strong geopolitical headwinds across the global landscape, will no doubt lead to another year of volatile prices. In the absence of a major economic downturn, copper’s supportive fundamentals should keep price risk skewed to the upside. On the positive side, The Chinese government recently announced that it has no plans to further reduce the subsidy on EVs in 2020. It is believed that the decision to keep the subsidy will help to support EV sales, production and related copper demand in 2020.This change in approach to EVs in China is in line with developments in other regions. In Europe, the likes of Germany and Norway continue to ramp up EV-related incentives, supporting copper consumption in the region. In consultation with German automakers, the so-called "Environmental Bonus” incentive has been raised to a maximum of €6,000 for battery EVs priced up to €40,000. In the US, some States have extended subsidy offerings, while others are introducing similar incentive programs. In the other markets, the Chinese government plans to end the subsidy on newly approved onshore and offshore wind projects in 2021 and 2022, respectively. In the US, tax incentives for new solar power installations have started to wind down this year and the subsidy on wind power generation will also begin to decrease next year.s a result, we believe that demand for copper will be brought forward in both China and the US in 2020, as developers rush to install new capacity ahead of these changes.

Moreover, The Chinese government recently approved new standards, beginning in July 2020 that will re-categorise some copper scrap as "renewable copper material. The new threshold for copper content of imported copper scrap has been set at 97 per cent and 56 per cent for brass scrap. This threshold is noticeably above the average copper content for copper and brass scrap imported in 2019.In addition to the changes in scrap-related policies in China, rising costs to upgrade scrap ahead of export to China will likely incentivise more secondary consumption capability to be built in scrap generating and/or processing countries.

The outbreak of the Coronavirus in China replaced the trade war as the leading concern weighing on the Chinese economy. As the number of cases rise and pop up in other countries around the world, the threat to both the Chinese and global economic landscapes is growing. The Chinese government has addressed the risk of the spreading virus but it had already caused 170 deaths with over 7,700 reported cases. In the near term, the rising potential for a global pandemic with China as ground zero for the health emergency has caused the price of copper to tank.

Dr. Hanish Kumar Sinha
Deputy Vice President - Research & Development
National Bulk Handling Corporation Pvt. Ltd.

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