Structural Deficit in Copper Supplies to Keep Under Current Firm

Just two years ago copper was floundering at the lowest level since the global financial crisis. Now the metal often viewed as a barometer of the world economy is heading for its best year since 2010 on bets that miners can’t dig fast enough to keep up with strengthening demand. The copper market continues to be range bound with firm under current as copper concentrate markets are tight and are set to enter into structural deficits.2018 is expected to be another year of significant concentrate shortage with mine supply only growing 1.5 per cent. The Gap is expected to further widen in 2019 and past 2020 the shortage reach to entreatingly significant levels. Supply concerns are looming large on the Chilean mines as Los Pelambres mine workers have voted against wage offers. An important point of concern is the number of contracts up for renewal – as many as 34 labour contracts are up for renewal this year of which just nine are earmarked high risk. Last year ten high-risk projects resulted in only two disruptions: Escondida, and Quebrada Blanca. The union accepted an offer to begin early negotiations with the Anglo-Australian miner in March in an effort to avoid another strike at the northern Chile mine but has not made any positive headway. The demand for copper remains strong from developing economies and China owing to large scale infrastructural expansion and automobile industry revolution – Increased demand for electric vehicles. 

Coming into the details of supply in the copper market, the short term supply has shown a marginal increase. World mine production is estimated to have increased by around 3.5 per cent in January 2018, with concentrate production rising by 3.7 per cent and solvent extraction-electro-winning (SX-EW) by 3 per cent. The increase in world mine production, which amounted to 60,000 t copper, was mainly due to a 6 per cent rise in Chile, the world’s biggest copper mine producing country, where concentrate output increased by 9 per cent with SXEW production remaining essentially unchanged, a recovery in SX-EW production in the Democratic Republic of Congo (DRC) and Zambia and higher production in Indonesia and China.  Although no major supply disruptions occurred in January, overall growth was partially offset by lower output at some mines in Canada (-11 per cent), Peru (-4 per cent) and the United States (-12 per cent). On a regional basis, mine production is estimated to have increased by around 15 per cent in both Africa and Asia, in Europe by 3 per cent while remaining essentially unchanged in the Americas and Oceania.World refined production is estimated to have increased by about 5.2 per cent in January 2018 with primary production (electrolytic and electro-winning) rising by 5.3 per cent and secondary production (from scrap) increasing by 5 per cent. The main contributor to growth in world refined production was China (increase of 8 per cent) due to its continued expansion of capacity. Production in Indonesia and Japan was also substantially higher recovering from constrained output last year due to a strike and a maintenance shutdown. 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 0.5 per cent and 8 per cent declines in refined production in Chile and in the United States, respectively. On a regional basis, refined output is estimated to have increased in Africa (14 per cent), Asia (8.5 per cent) and Europe (2 per cent) whilst declining in the Americas (-3.5 per cent).

Copper demand is likely to surpass supply earlier than expected, with the first clear signs coming as early as next year, is view by most of the experts attending the 17th World’s Copper Conference being held in Santiago, Chile. The expected copper supply crunch is likely to become "much more real” in 2019, due to the lack of mega-projects coming on stream before the mid-2020s and as global production will peak by the second half of next year. The situation looks even worse when considering that over 200 copper mines currently in operations is expected to reach the end of their productive life before 2035. Apart from the strike factor one should also consider that most disruption is actually technical and often relating to new ramp ups. Absence of major Greenfield projects, last year's disruption was below 5 per cent even with very high strike loss.

Scrap enters at several points of the supply chain as secondary smelters, in refining and as direct-melt, which cannibalises refined cathode demand. Last year the ICSG believes direct scrap use grew by 10%, and German and US refined consumption was actually negative as a result. This year it is expected that refined and total copper usage to grow at a closer parity from the evidence that at these higher prices scrap flows (ex-China) had not dramatically increased.The tightness in the Chinese copper scrap market is also providing support to the prices. China had banned traders from importing of Cat. 7-grade scrap, responsible for 60-70 per cent of scrap imports by tonnage which bynext year the ban is expected to go across all industry. It might have a temporary effect on the overall copper industry as investments are ongoing in South-East Asia to process the scrap into deliverable form. Major Problem with the copper scrap is with Western traders and stocks parked in Hong Kong. Western traders are stuck with an abundance of low-grade scrap, cables etc., that they cannot process and Scrap stocks parked in Hong Kong are indeed extremely high which are expected to remain dumped as the possibility of its being exported to China has turned bleak.While in tonnage terms the Cat.7 ban is frightening, it only grades around 14 per cent making up 20-25 per cent of total scrap units imported. Therefore 30-40 per cent of imports from non-Cat.7 makes up 70 per cent of the units, so these higher grades have great potential to offset losses. Chinese trade data is also reflecting the imports shift to higher grades.

The world economy is taking off, factories are humming again and copper futures prices are jumping. Import curbs by China on scrap imports leave more for buyers elsewhere, especially Europe, where scrap discounts are way above long-term averages. On the other side, buyers in China could turn to copper cathode as the restrictions on scrap kick in and orders come through after the end of the Chinese New Year holiday late next month, finally pushing up premiums. In the recent development, The North American unit of a Chinese customs inspection firm said it would suspend checks on cargoes of scrap metal from the United States for a month from May 4 to June 4 2018, effectively halting all imports of U.S. scrap, which is going to add more pressure on the market supply, thereby given more support to the copper prices. The suspension comes amid a broad crackdown on pollution in China and stricter regulation around waste imports. Last year, China imported a total of 5.74 million MT of scrap metal, mainly scrap copper and aluminum, according to official data. Thus we see that with the fall in activity in copper concentrate is adequately being reciprocated with the rise in activity in the scrap market keeping the overall investment sentiments in balance.

Hanish Kumar Sinha
AVP & Head, Research & Development
National Bulk Handling Corporation Pvt. Ltd.