Weakness Engulfs Copper amidst Subdued World Industrial Growth

Posted on 5th October 2019 by Hanish Kumar Sinha, Deputy Vice President - Research & Development, NBHC

The weakness in the manufacturing data across the major economies has resulted in keeping the copper market in the grip of bears. The trade war between the China and US is adding to the woes and its continuity is hampering the overall sentiments as copper is extremely sensitive to geopolitical developments. As per ICSG estimates that the global refined copper market was in a deficit of 220,000 tons in the first half of the year. In commodity markets, a deficit is a scenario where demand exceeds supply. In the medium to long term, underlying demand-supply dynamics drive commodity prices and the slowdown in Chinese demand owing to extended Sino – US trade war is truly reflected in the China’s lower economic growth rates.Usually, deficits support commodity prices. Along with trade war uncertainty and stalling manufacturing activity, falling global car sales also hurt copper prices. Copper miners expect electric vehicles to drive the global copper demand. There’s high copper intensity in electric vehicles compared to internal combustion engine cars. However, electric vehicles account for a small percentage of total vehicle sales. Electric vehicle sales would need to rise significantly to move the needle for copper demand.

On the supply side, this year, falling production is doing no more than preventing the copper price falling further. As the market is more affected by the shrinking demand and continued Trade War.  Preliminary data indicates that world mine production declined by about 1.4 per cent in the 1st half of 2019, with concentrate production declining by 1 per cent and solvent extraction-electro-winning by 3.5 per cent. Reduced output in two major producing countries, namely Chile and Indonesia led to decline in overall production and ate away the potential growth in other countries. Production in Chile, the world’s biggest copper mine producing country, declined by 2.5 per cent mainly due to lower copper head grades. Concentrate production in Indonesia declined by 55 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 aggregated growth of 13 per cent in 2018, production in the Democratic Republic of Congo (DRC) and Zambia remained essentially unchanged in the first half of 2019 as temporary reduced production at some mines 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 North America and 7 per cent in Oceania but declined by 6 per cent in Asia, 1 per cent in Latin America and 3 per cent in Europe and remained essentially flat in Africa.

Preliminary data indicates that world refined production declined by about 1 per cent in the 1st half of 2019 with primary production (electrolytic and electro-winning) declining by 1.5 per cent and secondary production (from scrap) increasing by 1 per cent. A 38 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 15 per cent. A decline of 33 per cent in India’s production was negatively impacted by the shutdown of Vedanta’s Tuticorin smelter in April 2018. A 28 per cent decrease in Zambian refined output due to power supply interruptions, smelter outages and the introduction on 1st January 2019 of a 5 per cent custom duty on copper concentrate imports constraining smelter feed. Reduced output in Japan, Peru, the United States and a few European countries due to smelter maintenance shutdowns have resulted in lower output. However these reductions were largely 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 (2 per cent) and in Oceania (15 per cent) but declined in Africa (-9 per cent), the Americas (-10 per cent) and in Europe (-1 per cent).

The problem is that demand is weakening almost as fast as production. Even that assessment may be on the rosy side given the problems calculating usage in China, the world’s largest consumer. Apparent usage in China was up by 3 per cent in the first six months of 2019, according to the ICSG. But bank analysts are sceptical. Both JP Morgan and Morgan Stanley are looking for Chinese demand to rise by just 1.5 per cent this year, while Goldman Sachs is anticipating even weaker 0.5 per cent growth.The problems are multiple, ranging from weakness in the automotive sector to lower-than-expected investment in the power grid and the much-discussed gap between new housing starts (positive for steel) and completions (positive for copper). Outside of China the copper demand picture is even worse, as the demand has shrunk at a faster rate. The continuing trade tensions between the United States and China dominate the headlines but there are other negatives at work such as the trade stand-off between South Korea and Japan, both major manufacturing hubs. Europe is a particular point of underperformance. The European regional output of semi-manufactured copper products is also running about 12 per cent below last year’s levels. This is down to "overlooked” headwinds such as negative developments in Brexit, Italian political uncertainty and Turkish currency instability. The slowdown in industrial growth in US also weighing hard on the copper market as the outlook is rapidly darkening, given the sharp drop in the Institute for Supply Management’s (ISM) and Purchasing Managers Index (PMI). China’s official purchasing managers index remained in contraction and weak territory for the fourth straight month in August, although the private-sector Caixin index generated a slightly more positive reading above the 50 growth-contraction threshold.

In spite of the slowdown and weakness in the manufacturing index, the Chinese import figures have been still quite robust and supportive for the overall market sentiments. The country’s smelters continue to hoover up raw materials with imports of mined concentrates booming. Last year’s imports came in at a record 19.7 million MT (bulk weight) and imports in the first eight months of this year were up another 11 per cent at 14.4 million MT.Hopes for a breakthrough in the stalled U.S.-China trade talks provided an important lifeline for copper over the back end of last week. The faster economic indices deteriorate, the greater the expectations for a stimulus reaction whether it be in the form of U.S. Fed interest rate cuts, more quantitative easing from the European Central Bank or more infrastructure spend from China.

With the changing global and environmental conditions, there is no longer much dissent over the need for a global decarbonisation policy. Even the Russian government is indicating it will sign the Paris climate accords. International oil companies talk about their products as "transition” fuels and scatter pictures of biofuel production and solar panels throughout their annual reports. Renewable energy resources have been nodded at by all these assemblies of respectable and important people. Wind and solar, though, requires three to 15 times as much copper per unit of output as fossil fuel generation. Such global policy developments along with the increased demand for Electric Vehicles do confirm the future of the copper market is well secured.

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

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