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Copper Struggling to Find Stability amidst Increase Global Uncertainty

Posted on 6th August 2018 by Hanish Kumar Sinha,AVP & Head, Research & Development, NBHC

The market is currently struggling to find support amidst the increased threat of a further surge in trade hostilities between the US and China. The U.S. trade fight is getting nastier and it's more likely to escalate. US administration is considering bumping the proposed 10 per cent tariffs on $200 billion in Chinese goods to 25 per cent which is being considered after Beijing retaliated against the administration's imposition of 25 per cent tariffs on $34 billion in goods. Since China is the largest consumer of copper with over 45 per cent of the global market, any move in creating the uncertain trade environment is going to hamper the overall direction and quantum of trade.

In the continued row of the continued US-China Economic tensions marginally overshadowed the news that workers at the world's largest copper mine are planning to down tools for at least 30 days if part-owner operator BHP doesn't agree to their demands. There are ample chances that the strikes may also affect the upcoming contract negotiations could also lead to outages at Chile's state-owned Codelco operations which include the Andina, El Teniente, Salvador, Ministro Hales and Gaby mines and the Caletones smelter. Moreover, BHP, the world's fourth-largest copper producer has already started on the contingency plans ahead of a possible strike at Escondida in Chile, responsible for nearly 5 per cent of primary global copper supply. If we combine the two company's possible strike, over 12-15 per cent of the global production could be at stake.

World mine production is estimated to have increased by 6.1 per cent in the first four months of 2018, with concentrate production rising by 6 per cent and solvent extraction-electro-winning (SX-EW) by 6.5 per cent. The increase in world mine production, of about 380,000 MT copper, was mainly due to constrained output in the comparative period of 2017 namely in Chile and Indonesia, production in Chile, the world's biggest copper mine producing country, increased by 15.5 per cent mainly because production in February/March 2017 was constrained by a strike at Escondida (the world's biggest copper mine) but also due to an improvement in Codelco's production levels, Indonesian output increased by 50 per cent because comparative output in 2017 was negatively affected by a temporary ban on concentrate exports that started in January and ended in April, an 11.5 per cent increase in SX-EW production in the Democratic Republic of Congo (DRC) and a 16 per cent rise in Zambian mine output due to the restart of temporarily closed capacity. Although no major supply disruptions occurred in the first four months of this year, overall growth was partially offset by lower output at some mines in Canada (-10 per cent) and in the United States (-11 per cent). After a strong increase in the last few years due to new and expanded capacity, output in Peru (the world's second-largest copper mine producing country) has leveled off. On a regional basis, mine production is estimated to have increased by around 12 per cent in Africa, 5 per cent in the Americas, 6.5 per cent in Asia, 3 per cent in Europe and 9 per cent in Oceania.

World refined production is estimated to have increased by 1.5 per cent in the first four months of 2018 with primary production (electrolytic and electro-winning) rising by 0.5 per cent and secondary production (from scrap) increasing by 7 per cent. In tonnage terms, the main contributor to growth in world refined production was China due to its continued expansion of capacity. Production in Chile was up by 6.8 per cent supported by a 7.2 per cent increase in electro-winning (SX-EW) production mainly because comparative output in 2017 was constrained by the strike at Escondida referred to previously. In addition, primary electrolytic production increased by 6 per cent mainly due to improved production at Codelco. Production in Indonesia and Japan was also substantially higher, recovering from constrained output last year that was due to a strike and maintenances shutdown respectively. Increases in electro-winning (SX-EW) output in the DRC and Zambia also contributed to world refined production growth. However, overall growth was partially offset by declines in India (shutdown of Vedanta's smelter/refinery in April), in Peru, Poland and the United States. On a regional basis, the refined output is estimated to have increased in Africa (10 per cent) and Asia (2 per cent) while remaining essentially unchanged in Europe and in the Americas.

The positive demand prospect of the long-term is still keeping the copper market positive. Two-thirds of the copper produced since 1900 is still being used. Few other resources can match that figure, and asenvironmental sustainability rises to the top of the global agenda. Copper's incredible recyclability not only mitigates pollution caused by producing materials such as wood and plastic, but it's also a key to the recycling of minerals such as silver, gold, and nickel. Every year, 8.5 million tons of copper is recycled. According to a report commissioned by the International Copper Association (ICA) for IDTechEx, the number of roadworthy electric and hybrid vehicles is expected to reach 27 million by 2027. Compared to the internal combustion engine, battery-powered vehicles require approximately more than 130 lb of copper. So, all of those electric and hybrid vehicles add up to 600,000 tons of additional copper demand by 2027. According to a 2017 study by the International Energy Agency (IEA), sectors previously confined to fossil fuels are becoming increasingly electrified. The result is millions of new appliances, air conditioners, refrigerators, and vehicles in need of power. Much of that power will be carried and distributed by copper. Last but not the least, as we've seen in the automotive and energy industries, architects are turning to copper components to decrease the environmental impact of new buildings. In North America, copper has been used to clad and adorn buildings to aid durability and sustainability. Copper's corrosion-resistance even helps these buildings withstand damage from extreme weather conditions.

Based on the demand prospects and recent Chinese ban on smelting units, refiners in Southeast Asia and India are best poised to take advantage of additional demand as the world starts turning to secondary copper during the next decade. Though China is currently the largest consumer of global copper scrap, in April 2018 it enacted an import ban on Category 7 copper scrap (including coiled copper and waste motors), which will go into effect by 2019. This will increase the amount of available scrap for recycling at an international level. Southeast Asian refiners in Vietnam, Indonesia, Malaysia, Myanmar, and Laos, as well as India, have all been named by industry experts as potential alternative refining locations. As the world moves to new forms of energy and as metals such as lithium and cobalt become superstars, the copper market will not see the same dramatic changes. Its traditional uses will continue to dominate, but increased use in new technologies like electric vehicles will exacerbate deficits and potentially support recycling and alternative extraction.

Hanish Kumar Sinha
Dy.VP & Head
Research & Development

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