Copper hit by poor demand

Scrap copper cable price

It’s turning out to be a bad year for copper supply.

 

Both mined and refined production fell in the first half of the year, according to the International Copper Study Group (ICSG). What was always going to be a year of weak supply growth has been made worse by a stream of supply disruptions.

At other times such production woes would have been a red flag for copper bulls, who like nothing more than trading copper’s notoriously volatile supply side.

This year, however, falling production is doing no more than preventing the copper price falling further.

At $5,665 per tonne London Metal Exchange (LME) three-month copper is a long way off April’s highs above $6,600 and is now down by 3% on the start of January.

The problem is that copper demand is faring just as badly as supply, with manufacturing activity contracting just about everywhere.

Supply hits

World mine production fell by around 1.4% in the first half of 2019, according to the ICSG’s latest monthly statistical bulletin.

Concentrates output declined by 1%, while straight-to-metal SX-EW (solvent-extraction-electrowinning) mines produced 3.5% less than last year.

Some of this was expected, such as the 55% decline in Indonesian production, where both the Grasberg and Batu Hijau mines are transitioning between ore bodies.

However, unexpected supply disruptions have also been accumulating.

Analysts at JP Morgan have slashed almost 839,000 tonnes from their production forecasts due to weather disruption in Chile, strikes in Peru and lower output in the African Copperbelt, “where a host of fiscal and legislative issues have crippled production”. (“Metals Quarterly”, Sept. 23, 2019).

ANALYSTS AT JP MORGAN HAVE SLASHED ALMOST 839,000 TONNES FROM THEIR PRODUCTION FORECASTS DUE TO WEATHER DISRUPTION IN CHILE, STRIKES IN PERU AND LOWER OUTPUT IN THE AFRICAN COPPERBELT

The downward revisions equate to 3.7% of the bank’s initial production expectations and 74% of its forecast disruption allowance for 2019. The rate of disruption is running at levels not seen since 2012.

Disruption at the refined metal stage of the supply chain is even worse. World refined production dropped by 1% in the first half of 2019, according to the ICSG, with a 1.5% decline in primary output offset by a slight lift in secondary (from scrap) production.

The ICSG’s May forecast for a 2.8% increase in production has been undone by problems in Chile (technical), India (the continued suspension of the Tuticorin smelter) and Zambia (power interruptions, smelter outages and a new tax on imported raw materials).

Other things being equal, such a litany of supply woes would mean a higher copper price.

Not this year, though.

Demand weakness

The problem is that demand is weakening almost as fast as production.

The ICSG, which was forecasting in May a 2% increase in global apparent usage this year, estimates that usage actually fell by 1% in the first half of the year.

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% 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% this year, while Goldman Sachs is anticipating even weaker 0.5% 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, the ICSG calculating a 3% decline in the first half of the year.

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.

Goldman Sachs estimates regional output of semi-manufactured copper products is running 12% below last year’s levels. This is down to “overlooked” headwinds such as Brexit, Italian political uncertainty and Turkish currency instability. (“Copper demand pick-up delayed, but not derailed”, Sept. 27, 2019).

Tipping the balance

The United States was the previous stand-out in terms of manufacturing activity.

However, even here the outlook is rapidly darkening, given the sharp drop in the Institute for Supply Management’s (ISM) purchasing managers index (PMI).

The index slumped to 47.8 last month, below the 50 mark which denotes expansion or contraction and the weakest reading since the recession of 2009.

JP MORGAN HAS JUST CUT ITS 2020 AVERAGE PRICE FORECAST FROM $5,400 TO $5,050 NEXT YEAR

This means, to quote BMO Capital Markets, that over two-thirds of global PMI readings are now either in negative or at best neutral territory, suggesting a cold recessionary wind is blowing through the global manufacturing sector.

Moreover, delve beneath the headline readings and it becomes clear that new orders are falling even faster, implying things are going to get worse before they get better.

This is why funds are still holding a mega short position on “Doctor Copper” on the CME exchange. The collective bear stance has retreated slightly to a net 52,655 contracts from an August peak of 74,597, but by any historical yardstick this is still a big short bet.

Against such a backdrop, copper’s supply woes are sufficiently acute to prevent a demand-led price meltdown.

Bulls can take heart from the fact that the physical market is not being overwhelmed by surplus metal. Global exchange stocks of copper ended September at 413,000 tonnes, up 62,000 tonnes on the start of 2019 but down by 56,000 tonnes on August 2018.

The market feels just about balanced, although as ever with copper there is no clear consensus as to whether that balance leans to the side of supply surplus or supply deficit.

The ICSG calculates a deficit of around 220,000 tonnes in the first half of the year but this is a marginal call in a 24-million-tonne-plus global market.

Nor is there any clear consensus as to what happens next. Goldman Sachs is remaining medium-term bullish with a 6-month call on copper at $6,500 per tonne.

JP Morgan has just cut its 2020 average price forecast from $5,400 to $5,050 next year.

The difference in views is all about the demand outlook. Goldman is expecting a bounce, JP Morgan a further deterioration, particularly in China.

Copper’s supply instability is a “known known”. Right now, though, it’s copper demand that is the big “known unknown”.

(By Andy Home; Editing by Louise Heavens)  Source from reuters 

Trump tariff tweet hammers copper price to 7-month low

The price of copper was hammered on Friday amid an escalating trade war between the world’s two largest economies and a global economic slowdown.

 
 

In early afternoon trading in New York, copper for delivery in July touched a low of $2.5685 a pound ($5,660 a tonne), down 3.6% from Thursday’s settlement to its weakest point for 2019.

Copper is now trading 23% below levels seen in June last year, technically placing the bellwether metal in a bear market.

US President Donald Trump said on Thursday he would impose an additional 10% tariff on $300 billion worth of Chinese imports, starting September 1, meaning effectively all Chinese exports are now subject to tariffs of at least 10%.

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Shaky start for scrap metals in 2019

Base metals have had a shaky start to 2019, with a cautious first-quarter advance giving way to an April drop on uncertainty about the global economy and the impact Chinese stimulus will have on consumption.

Clouding the outlook are mixed signals on world growth. China’s first official gauge of the manufacturing sector fell in April, indicating that more may be needed to bed down the economic stabilization seen earlier this year. The euro area’s manufacturing slump showed tentative improvement, while data showed U.S. unemployment fell to a fresh 49-year low. Hanging over the market, though, is the question of when the U.S. and China will resolve their prolonged trade spat.

Growth prospects, as well as supply outlooks for the most-traded base metals, will be among topics discussed as traders, executives and financiers gather in Hong Kong for the annual LME Week Asia event. Here’s a summary of key discussion points:

Copper

Copper’s long-term appeal is a staple topic at LME gatherings (see here, here, and here). But the metal has failed to break out of a modest range since its slump in mid-2018, even as global mine supply tightens. Prices are often tied to the global macro mood, which has been soured by U.S.-China trade tensions and muted manufacturing activity.

In China, government stimulus has proved underwhelming so far, according to one of the nation’s top traders. Import premiums are waning and a high-profile trader’s financial woes are also weighing on sentiment. Barclays Plc predicts prices may end the year below $6,000 a ton, saying the macro backdrop still matters more than any supply issues. Still, copper bulls may take heart after Codelco said the downtrend in prices won’t last as consumption growth outstrips supply.

Zinc

The key question in the market is whether China’s zinc smelters can process increasing global mine supply. Output constraints in the top producer — due to various disruptions and environmental strictures — have crimped their ability to do so. With treatment charges still at elevated levels, there’s growing expectations of a supply response from smelters that will pressure global prices. But not everyone is convinced.

“The economics of zinc are already telling smelters to produce as much as they can, and I don’t think that’s happening,” Colin Hamilton, managing director for commodities at BMO Capital Markets Ltd. said in a phone interview. “The question is, are we going to see them ramp up? If not, the zinc market has a problem because refined inventory is still very low”.

Aluminum

Last year was turbulent, with the market dominated by the prospect of U.S. sanctions on United Co. Rusal. With that episode resolved, attention has turned to more familiar concerns, especially Chinese capacity. Prices in London are broadly in line with where they started the year, constrained by weakness in demand and uncertainties around new Chinese plants.

Aluminum optimists point to dwindling stockpiles in China, greater restraint in permitting new capacity, as well as rising consumption. But some producers aren’t feeling so upbeat. China’s recent better-performing prices — crucial to setting the global tone — are “ unsustainable” given substantial capacity still waiting in the wings, Rusal warned in April.

 

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Chinese market importing more copper in 2019 than 2018

The price of copper dipped on Monday despite trade data showing Chinese imports of refined copper rebounding in March while ore and concentrate shipments continue to strengthen.

Copper for delivery in May traded as low as $2.916 per pound ($6,430 a tonne) on the Comex market in New York, down from just shy of the $3.00 mark reached a fortnight ago.

China consumes half the world’s copper, and trade data released over the weekend showed the country’s imports of unwrought copper jumped 26.5% compared to the same month last year at 391kt.

For the first quarter, imports of refined copper are down 4.3% to 1.18mt however. Last year China imported a record 5.3m tonnes of refined copper.

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Metals in meltdown since Summer 2018

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After a strong start to 2018 following a 22% rally last year, nickel’s fall has also been swift, with the metal mainly used in steelmaking down 30% from its summer highs. Zinc and lead have reversed most of their 2017 gains while tin is the only base metal with a shot at ending the year in positive territory. The London Metal Exchange index is set to suffer its first down year since 2015.

Copper producers have been the worst hit in the mining sector this year, with US-based Freeport-McMoRan declining 47% from its 2018 peak. Toronto’s First Quantum Minerals is trading 53% below its 52-week high. Peru-focused Southern Copper Corp has dropped 46% since the summer while the decline for London-listed Antofagasta is 36%.

Among the diversifieds, Rio Tinto is also in bear market territory, but BHP has fared better – containing share price decline to 10% compared to the counter’s year high. Like the Anglo-Australian giants, Brazil’s Vale – down 18% from its 2018 high – has benefited from a relatively strong iron ore price, comprising the bulk of earnings for mining’s Big 3.

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