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Copper Shapes up for Good Long Term Upsurge

Posted on 2nd May 2019 by Hanish Kumar Sinha, Deputy Vice President - Research & Development, NBHC

Copper continues to trade range bound on short term fundamentals, though the long term fundamentals continue to be robust providing increased underlying strength to the prices and not allowing it to slump drastically. The global economic uncertainties are been increasing as the final truce between US and China tariff dispute is yet to be achieved. US has escalated the trade war with China by announcing plans to hike the tariff imposed on $200bn of Chinese goods from 10 percent to 25percent and has further threatened to impose tariffs on all Chinese trade with America, a move that could further destabilize relations between the two economic powers. The U.S. imports goods from China totalling $539.5 billion and the trade deficit stood at $419.2 billion in 2018, according to the U.S. Trade Representative. If Trump follows through with his threats, virtually all goods imported from China to the U.S. would face some sort of tariff. The move is likely to impact more than 5000 products made by Chinese farms and factories, from fresh and frozen food to chemicals, textiles, metalwork, building materials, electronics, and consumer goods. The escalation of the dispute has been recently being blamed for a slowdown in global growth.

Supply disruptions, including rains in Chile and protests in Peru, kept the market in deficit, even as demand for so-called concentrate or the semi-processed ore eased up as a result of a four-month stoppage at two of Codelco's four smelters. New smelter capacity in China has been coming up owing to the new copper emission standards being implemented in China, which is expected to increase the competition for concentrates. The case for a supply-driven deficit in copper this year is strengthened by an announcement from Glencore Plc that it would cut capacity by half at its Mutanda plant in Congo, a two-month road blockage at MMG Ltd.'s Las Bambas mine in Peru and rains in northern Chile at the beginning of the year. The supply shortages to worsen in the second half of 2019, with less copper concentrate in the market and more smelting capacity.

The latest supply details reveal that world mine production is estimated to have remained essentially unchanged in January 2019 compared to January 2018, with concentrate production remaining flat and solvent extraction-electro-winning increasing by 0.4 percent. Although a few countries experienced strong growth, this was largely partially 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 4 percent mainly due to lower copper head grades. Indonesian concentrate production declined by 45 percent primarily as a consequence of the transition of the country's major two mines to different ore zones leading to temporarily reduced output levels. Production in the Democratic Republic of Congo (DRC) and Zambia continues to ramp-up mainly as a result of the restart of temporarily closed capacity in both countries. Production in Peru (the world's second-largest copper mine producing country), Australia, China and Mongolia also increased due to improved grades or recovery from the constrained output in 2018. On a regional basis, mine production is estimated to have increased by around 10 percent in Africa and 5 percent in Oceania but declined by 4 percent in Asia and 0.7 percent in Latin America and remained essentially unchanged in Europe. Preliminary data indicates that world refined production is estimated to have increased by 3 percent in January 2019 with primary production (electrolytic and electro-winning) increasing by around 3.1 percent and secondary production (from the scrap) by 1.9 percent. The main contributor to the growth in world refined production was China due to its continued expansion of capacity. Other countries recovering from production constraints in 2018 such as Australia and Brazil also contributed to growth. A rise in electro-winning (SX-EW) output in the DRC also contributed to higher world refined production. However, overall growth was partially offset by a 14 percent decline in Chilean output impacted by temporary smelter shutdowns while undergoing upgrades to comply with the new environmental regulations. Production in India continues to be negatively impacted by the shutdown of Vedanta's Tuticorin smelter. On a regional basis, refined output is estimated to have increased in Africa (7 percent), Asia (6 percent), Europe (2 percent) and Oceania (25 percent) while declining by 7.5 percent in the Americas.

Despite the slowdown in the global economy and disruption to the Chinese economy which could probably trigger retaliatory action by Beijing, the fundamental demand for copper has been unshaken owing to expansion plans of several global countries. Nearly 28 million tonnes of copper are used annually. According to the World Energy Outlook, growing electrification means electricity is expanding to sectors previously confined to fossil fuels, including vehicles and heating and cooling systems. Countries continue to pivot away from conventional energy sources, supported by massive private sector investment into low-carbon energy. 2018 marked the fifth consecutive year clean-energy investment exceeded $300 billion. 2019 is expected to be close to reaching $300 billion for the sixth successive year. China remains at the heart of this energy revolution as the world's largest producer, consumer and investor in renewable energy. The country is upgrading its capacities in renewable energy production and consumption and accounts for 36 percent of all renewable energy growth worldwide. During the first half of 2018, China's hydro, nuclear, wind, solar and other non-fossil energy systems generated more than 25 percent of its overall power supply. China will remain a leader in electrification in 2019 as its Thirteenth Five-Year Plan prioritizes renewable energy development. As expected, in 2019, the copper industry will be monitoring proper investment initiatives to finance on-the-ground activities in developing countries of critical importance, as they represent one-billion new electricity consumers by 2030. Since the technology already exists, assisting these countries and their growing middle class will ensure a low-carbon and sustainable solution.

Thus, sustainable copper production is becoming more prominent in the minds of consumers. The global visible inventory in the form of combined stocks held by the London Metal Exchange, Comex and the Shanghai Futures Exchange have nearly halved from a year ago to around 500,000 tonnes. Thus, 2019 is shaping up to be the year for accountability. The global industry is planning for substantial growth in the next decade thanks to an expected boom in production of electric vehicles, which use twice as much copper as internal combustion engines. Automakers are vowing to produce all-electric fleets. Consumer electronics companies, auto manufacturers and major retailers, among others, are going green through their certified sourcing programs and are working increasingly close to their supply chains to help achieve sustainability goals. A lack of new supply and steady demand this year for the metal, widely used in power and construction, should keep the 25-million-tonne market in a slight supply deficit and support prices. The current year presents major opportunities for clean energy and the copper industry. Copper has a key role to play in the development and rollout of new technologies leading to a more sustainable economy, such as EVs and global electrification. With outstanding conductivity, copper significantly enhances the efficiency of electrification, making it an indispensable component in developing renewable energy. The copper industry is also at the forefront of the move to more responsible supply chains and recycling. This shift is relevant for all downstream businesses and consumers who are reliant on copper every time they use an iPhone.

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