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Copper Market Rebound amidst Partial Truce in Sino - US Trade Faceoff

Posted on 3rd July 2019 by Hanish Kumar Sinha, Deputy Vice President - Research & Development, NBHC

The global economies which were dwindling with the uncertainty regarding the direction of the market breathe a sigh of relief as the two leaders decided to break the ice and discuss the Trade conflicting issues. In the backdrop of G-20 meeting at Osaka, both Donald Trump and Xi Jinping agreed to another truce in their year-long trade war in order to resume talks aimed at resolving the dispute. Currently, China has insisted that all tariffs on Chinese imports added by the United States during the trade war must be scrapped immediately as part of any deal to end the year-long conflict, which would require the Trump administration to give up its position that some levies remain in place even after an agreement is reached while US administration has agreed to pause placing tariffs of up to 25 per cent on an additional US$300 billion of Chinese imports. There’s still a long way to go before the actual impact of the truce is percolated in the market, but since the fundamentals of the copper market is still in support of the bulls - as the supply deficit is likely to continue for the rest of the year and further, the above development provided the much needed boost.

Global copper mine production is expected to rise 3.7 percent per year to 22.6 million metric tons in 2019. Rapid annual increases are forecast for countries such as Canada, Mexico, and Zambia, where on-going development of copper projects will propel gains. In Central and South America - the leading regional supplier of copper ore and concentrates - Peru is projected to post robust gains in copper mine output. Production of copper ore and concentrates in Chile, which accounted for nearly 30 percent of global output in 2014, will rise at a more modest pace, limited by the country’s aging mines.As far as the current supply of copper is concerned, preliminary data indicate that world mine production has declined by about 1.3 per cent in the first quarter of 2019, with concentrate production declining by about 1 per cent and solvent extraction-electro-winning (SX-EW) by 3.5 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 5 per cent mainly due to lower copper head grades. Indonesian concentrate production declined by 52 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 11 per cent in 2018, production in the Democratic Republic of Congo (DRC) and Zambia increased by only 1.7 per cent in the first quarter 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, 2 per cent in North America and 5 per cent in Oceania but declined by about 3 per cent in Asia, 3 per cent in Latin America and 3.5 per cent in Europe. Preliminary data indicates that world refined production declined by around 1.1 per cent in the first quarter of 2019 with primary production (electrolytic and electro-winning) declining by around 1.5 per cent and secondary production (from scrap) increasing by 0.7 per cent. The decline in world refined production was mainly due to A 32 per cent decline in Chilean electrolytic refined output due mainly to temporary smelter shutdowns whilst undergoing upgrades to comply with new environmental regulations, decline of 45 per cent in India’s production negatively impacted by the shutdown of Vedanta’s Tuticorin smelter in April 2018, 28 per cent decrease in Zambian refined output due to power supply interruptions, smelter outages and the introduction on the 1st January 2019 of a 5 per cent custom duty on copper concentrate imports and reduced output in major producing countries including Germany, Japan, Peru and the United States due to smelter maintenance shutdowns. However, overall decline was partially offset by growth in China due to the continued expansion of Chinese smelter/refinery capacity. Other countries recovering from production constraints in 2018 such as Australia, Brazil and Poland also contributed to growth. On a regional basis, refined output is estimated to have increased Asia (2.5 per cent) and in Oceania (24 per cent) while declining in Africa (-8 per cent), in the Americas (-12 per cent) and remaining essentially unchanged in Europe.

Global demand for copper metal (produced from refined copper and recycled scrap) is projected to advance 4.2 percent per year through 2019 to 36.0 million MT, valued at $261 billion. Robust gains in building construction expenditures are expected to boost the use of copper wire, tube, and other mill products in applications such as building wire and plumbing. Increased infrastructure investment, particularly in developing countries, will further benefit copper suppliers as updates to national power grids drive the production of wire and cable. In addition, advances in global manufacturing output are expected to bolster the use of copper metal in transportation equipment, industrial machinery, domestic appliances, and other durable goods.

Nearly 50 percent of the demand for copper comes from the construction industry and 17 percent from the electrical sector. Copper is also used extensively in heavy and light engineering and in transport industries. From copper wire and communication cabling to copper plumbing and from the use of copper in integrated circuits to its value as a corrosive resistant material in shipbuilding and as a component of coins and cutlery, copper has a huge array of possible industrial uses.An excellent example of the growing demand for copper comes from the automobile industry, which are notorious copper gobblers as it consume between three and four times the amount of copper as traditional internal combustion engines. Currently, China is leading the world in EV adoption and will likely continue to do so for some time. In the fourth quarter of last year, China was responsible for 60 percent of global EV sales, according to Bloomberg, which adds that the country holds half of all vehicle-charging infrastructures. By the end of last year, electric cars made up about 7 percent of total new vehicle sales in China, with a compound growth rate of 118 percent since 2011. In about a decade, the Asian country will account for nearly 40 percent of the global EV market, followed by Europe (26 percent) and the U.S. (20 percent).

Lastly, the flexibility in the supply of copper is low. Supply is usually unresponsive to price movements in the short term because of the high fixed costs of developing new extraction processes and plants, which typically involve lengthy lead-times. Due to that pressure, investors seem resistant to investing in new copper mining facilities at this time. If existing copper mining businesses are working close to their current capacity, then a rise in world demand will simply lead to a reduction in available stocks. Thus a sudden flux in the demand for copper is bound to apply pressure on the existing supply mechanism and thereby boosting up the copper prices.

Hanish Kumar Sinha
Deputy Vice President, Research & Development, NBHC

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