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Copper Analysis and Forecast Q1 2013

 

Each Quarter FastMarkets and Sucden produce an analysis and forecast report for the Copper market, analysis on changes to copper prices in the global markets and forecasting for the next quarter which subscribers to FastMarkets Professional receive as soon as it is published,and daily analysis and research. To read the full report covering gold, platinum, palladium and base metals click here: 23.04.13,Quarterly_Metals Report, or to download the copper only report click here: QMR Copper

Copper Price Analysis Q1 2013

Copper prices continued to oscillate sideways around $8,000 per tonne in the first quarter, with three-month prices averaging $7,928. The high during this period was $8,346 while prices had been as low as $7,486.25; they have since dropped to a low of $6,800.

As the chart below shows, the broad sideways range has now held since the fourth quarter of 2011, which suggests the market is roughly balanced, with the price swings mapping the changes in the macroeconomic mood. This may start to change – it appears that the market is moving towards a more sustainable supply surplus and prices at the time of writing have tested support levels again, albeit for reasons triggered by factors outside the immediate sphere of copper fundamentals.

In late 2012 and early 2013, optimism was running high that the US economic recovery would continue and that China would move into recovery mode too. On the strength of that, metal prices ran higher while investment interest picked up. Although US data has tended to remain upbeat, Chinese data has been less constructive and a recovery in demand during the first quarter has proved to be fairly elusive. This forced a reappraisal of the outlook for commodity demand and a corresponding correction in prices.

That said we still have high hopes for a recovery in China and the extent to which this emerges in the months ahead will no doubt determine how well copper prices manage to hold up. Indeed, the manufacturing PMI data has boded well but latest GDP figures are disappointing.

Copper price Q1 2013

The market was in a deficit of 340,000 tonnes in 2012, according to preliminary data from the International Copper Study Group (ICSG), but it had swung into a surplus in October and remained in one for the whole of the fourth quarter – totalling 237,000 tonnes.

 

Copper Surplus 2013

This switch from deficit to surplus is in-line with expectations and, with stocks climbing and a surplus forecast for this year, there may well be downward pressure on prices especially while copper trades significantly above its marginal costs of production, which we put at around $5,000 per tonne. As always, the perceived ‘’magic number’’ for copper is around the $3 per pound, or $6,615 per ton, where substantial support can be expected, should the current lack of confidence in the metals markets continue.

Although ICSG showed a deficit in 2012, we do not feel this reflects reality because there was a large build-up of copper stockpiles in Chinese bonded warehouses, which distorts the Chinese apparent consumption data. If we assume that some 500,000 tonnes of copper went into bonded warehouses last year, the market was in effect in a slight supply surplus in 2012 rather than a deficit. All in all, though, we feel the copper market was probably well balanced last year.

Copper Demand in 2012

Global copper demand climbed 608,000 tonnes or 3.1 percent to 20.5 million tonnes in 2012 from 2011, ICSG data on world usage shows. Most of the increase came from Chinese apparent consumption, which rose 11 percent in 2012, which more than offset a 3.8-percent decline across the US, Japan and the EU. China’s surge in demand was, however, based on a 17-percent increase in imports, which no doubt gives a distorted picture of what actual demand was.

Overall, given the slowdown in China’s economic growth – the country’s manufacturing PMI was below 50 between July 2011 and October 2012, indicating manufacturing was contracting for most of 2012 – it seems likely that copper demand growth in China last year was subdued.

Copper Supply in 2012

Mine production rose 715,000 tonnes or 4.5 percent to 16.023 million tonnes in 2012 from the previous year, according to the ICSG. There were increases in China (26 percent) DRC (21 percent), Mexico (18 percent), Peru (five percent) and Chile (three percent), which more than offset declining output in Indonesia (26 percent) and Australia (four percent). The average world mine capacity utilisation rate climbed to 82 percent from 80.6 percent in 2011.

 

Historical global copper production and consumption (thousand tonnes)

2009 2010 2011 Jan- Dec2011 Jan-Dec2012 Change
Mine production 15,898 16,020 16,023 16,023 16,740 +4.5%
Refined production 18,272 19,003 19,649 19,649 20,132 +2.5%
Refined capacity utilisation 77.9% 79.7% 80.6% 80.6% 79.0%
Consumption 18,070 19,346 19,865 19,865 20,472 +3.1%
Refined balance +202 -343 -216 -216 -340
Period stock change +275 -177 6 6 200
Refined stocks (end period) 1,376 1,199 1,205 1,205 1,405 +16.6%

Source: ICSG

Refined output increased 485,000 tonnes or 2.5 percent to 20.132 million tonnes in 2012 compared with 2011, with primary output up 2.3 percent and secondary output up 3.3 percent. The main increases came from China (11 percent) via new capacity; Japan (14 percent), where the industry recovered from the 2011 earthquake and tsunami, and the DRC (28 percent), where new capacity was brought on line. Output declined six percent in Chile, three percent in the US and 45 percent in the Philippines after a fire at the country’s sole smelter. Capacity utilisation dropped to 79 percent from 80.6 percent in 2011.

 

Copper LME Stocks

LME Copper Stocks Copper exitLME stocks have started to climb again, rising 250,625 tonnes in the first quarter. We do not feel that the stock increase reflects the size of the supply surplus, because it has become apparent that some warehousing companies have been offering incentives of up to $100 per tonne to put metal into warehouse.

The incentive has probably led to the warranting of copper that was formerly off-warrant. Indeed, some of the metal moving into LME warehouses is believed to have come from Chinese bonded warehouses. That said, the supply surplus is more than likely to end up in the LME stock data too.

The notion that the copper surplus will end up in LME warehouses is interesting – the large exit queues at many LME warehouses could mean that the surplus ends up being kept off market, which in turn might prevent the surplus from weighing on prices. As we have seen in aluminium and zinc in recent years, sustained surpluses have not led to ever-decreasing metal prices. As the table opposite shows, where there are large tonnages of copper, there tend to be large levels of cancelled warrants too, which means it is likely to take considerable time to get hold of the copper in LME warehouses.

The exceptions are Busan where there are 46,400 tonnes of copper but total cancelled warrants stand at just 17,348 tonnes, and St Louis, where there are 22,550 tonnes of copper but only 6,750 tonnes of cancelled warrants. Still, the new LME load-out rates that came into effect at the start of April should shorten the exit queues for the likes of copper, which tends not to be the dominant metal in warehouse. Ironically, given the incentives being offered at certain warehousing locations, the new LME load out rules could help the relocation of stocks into areas where the metals can be more tightly held, thus exacerbating the tightness and premium structures.

LME forward spreads have also widened in recent months, raising the likelihood of surplus copper being tied into financing deals, which would be another way for traders and producers to keep metal off market. The three-to-15 months copper spread had moved out to around $105 per tonne contango by the end of March from an average of $76 in February and $61 in January, although recent movements have tightened the spread to just under $100

Last year, a considerable amount of copper in China was used as collateral against loans, effectively keeping it off market. With China expected to remain nervous about inflation, especially in the property market, we feel that lending practices will remain tight, which is likely to mean copper continues to be used for financial purposes. So there is now a situation where surplus copper is likely to be kept off market in China and in the West, which could go a long way to preventing copper prices from reacting to the developing bearish fundamentals.

One interesting aspect of the market is the mismatch in stock location and regional demand. With an estimated 1.1 million tonnes of copper in bonded warehouses and on the SHFE compared with 625,000 tonnes held on the LME and Comex, China holds around 63 percent of copper inventory but accounts for around 43 percent of global consumption.

But while China runs a structural copper deficit, with refined consumption of around 8.8 million tonnes and refined production of around 5.6 million tonnes, it seems unlikely that much of the Chinese stockpile will leave the country.. In recent weeks, the Arb window has been open spasmodically; again attracting metal from LME to Shanghai. It is noticeable that bonded warehouse stock levels have started trending downwards in recent weeks – attracted by premiums in Far Eastern LME warehouse?

With that in mind, it is lucky that a good proportion of the supply response is, for a change, not limited to China. In 2012, we estimate that Western copper production increased around 450,000 tonnes, a figure that is set to double to around 900,000 tonnes this year and nearer one million tonnes in 2014, which should help prevent the regional mismatch in stocks from causing tightness in the West. As the table on the next page shows, the ICSG forecasts global refined capacity to reach 26.854 million tonnes this year, which would be up 5.4 percent from last year.

Mine capacity is seen growing at an average annual rate of eight percent between 2013 and 2016. Peru will contribute the most to new output, accounting for 26 percent of the increase, with 10 percent coming from Zambia, eight percent from the DRC and seven percent from the USA.

What is interesting is that some 1.2 million tonnes per year of copper mine capacity by the end of 2016 will be in countries that have not been associated with copper mining in the past – these include Afghanistan, Ecuador, Eritrea, Israel, Kyrgyzstan, Panama and Sudan.

Smelter capacity is expected to grow at an average rate of 4.7 percent per year over the same period, with Asia accounting for 87 percent of the increase in capacity – the China, India, Indonesia and Iran totals will all increase. Refined capacity should reach 30 million tonnes per year by the end of 2016, a rise of 18 percent from 2012.

Interestingly, mine capacity is set to grow at a faster pace than smelter and refined capacities, which should enable concentrate stockpiles – which have been depleted in recent years – to be built up again. This should create a better supplied market with a bigger stockpile cushion to protect against any supply disruptions, all of which should provide consumers with some comfort – and possibly lower prices.

Projected global copper capacities (’000 tonnes of Cu content)

2012 2013 2014 2015 2016
Concentrate 15,648 16,554 17,496 19,570 22,019
SX-EW 4,733 4,891 4,865 5,301 5,686
Mine total 20,380 21,445 22,360 24,870 27,705
Smelter 19,130 19,838 21,151 22,366 22,972
Electrolytic Refineries 20,076 21,263 22,058 23,198 23,683
Refined Total 25,489 26,854 27,623 29,199 30,069

Source: ICSG

Chinese trade data showed increases across the board in 2012, with the increase in imports of scrap, concentrates and refined metal all suggesting restocking, which is now likely to provide some kind of cushion against price increases if demand starts to gather pace as we believe it will.

It will be interesting to see whether after the increase in imports last year and the build-up in stocks of refined copper in bonded warehouses leads to a drop in the level of imports in 2013. On paper, it does look as though there is enough stockpiled metal in China to cushion the market from a pick-up in demand, but it may be that a lot of the stockpiled copper is tied up in collateral deals and is therefore not readily available to consumers.

This could boost imports again – we note with interest that the LME/Shanghai arbitrage window reopened late in March, which implies demand for copper was strong enough to enable traders to start importing copper again, which supports the view that the copper already in Shanghai may not be freely available.

Chinese copper trade (’000 tonnes)

2009  2010  2011 2012 Jan- 2012 Jan 2013 Change
Exports
Refined copper 72.9 38.7 154 274 0 26.2 26.2
Imports
Refined copper 3,185 2,920 2,776 3,403 335 243 -27%
Copper scrap 3,998 4,364 4,687 4,859 229 380 +66%
Copper concentrates 1,717 1,813 1,789 2,192 168 213 +27%

Source: Official customs statistics

Copper Prices Current situation

The run-up in prices that started late in October last year and ran into February this year seems to have been fuelled by the combination of beliefs that the US would sidestep the fiscal cliff, which it seems to have done, and that China’s recovery would gain traction into 2013 and once the new leaders took the helm. This prompted a pick-up in fund buying that led to a faster and more pronounced rally in prices than was probably justified by the fundamentals.

Ultimately, the economic data out of China has not matched expectations and the change in political leadership in Italy and the botched bailout of Cyprus have also raised concerns that the crisis in the EU could escalate again. This prompted long liquidation by the funds, in turn triggering a price correction that has now wiped out all the gains made since last summer.  Very recently the entire market complex was spooked by the announcement from Cyprus of Central Bank gold sales, raising the question of whether this action could spread elsewhere in Europe. The fall out has been dramatic and copper prices have dropped to levels not seen for a very long time.

The Copper Price Outlook

In the previous quarter’s report, one factor that made us bullish on metals in general was the potential for apparent demand to improve after a period of global destocking throughout much of 2012. We still feel that there is still room for this once the current loss of confidence and volatility has worked its way through – and we expect restocking in China to lead the way.

Reports suggest that demand for autos, white goods and housing have made good recoveries and that the extra demand this has generated has so far been supplied from inventory. This bodes well for a pick-up in production – some manufacturers in China are already raising their growth forecasts for 2013, with many looking for growth in excess of 10 percent. If good demand is being met by drawing down inventory, it stands to reason that production will have to increase soon; when it does, that will mean consumption of commodities will improve too.

How 2013 turns out is likely to be determined by the extent to which consumers feel the need to restock. Manufacturing PMIs have become quite mixed – the US ISM number climbed to 54.2 in February from 53.1 in January and 50.7 in December but then dropped to 51.3 in March, which suggest the US recovery is still stop/start.

The Chinese number climbed to 50.9 in March, having dropped to 50.1 in February, from 50.4 in January and 50.6 in December. With the new government in situ and with the lunar New Year past, the recovery might start to gain traction. Japan’s manufacturing PMI climbed back above the 50 level in March to 50.4 from 48.5 in February and a low of 45.0 in December.

Europe’s PMI remains in the doldrums. The pan-EU number was 46.8 in March, up only slightly from 46.6 in February. Germany, generally considered to be the powerhouse of Europe, also shocked the market – its PMI fell to 49 in March from 50.3 – and France’s remained depressed at 44 in March.

The global PMI reading was last at 51.2, up from 50.9 in February but down from 51.4 in January. All in all, global manufacturing is expanding but at a subdued pace so the outlook for the rest of this year will depend to a great extent on whether more sustainable growth emerges in the US and China.

Overall, given the infrastructure spending announcements from last year, a belated recovery may now begin late into the seasonally strong second quarter. This could be a market-moving development for the metals.

In the current business climate, companies are sitting on piles of cash but are concerned about investing. Until solutions are found to Europe’s debt problems, this is likely to remain the case; still, some of this cash might well be mobilised – especially in North America – should US leaders come up with a workable long-term plan to manage the US debt and deficit. This issue has the potential to become a bullish factor for the market if it starts to unfold.

The debt crisis in Europe seems unlikely to go away soon; we expect it to remain a drag on the economy while austerity rules. In turn, demand for copper there is likely to remain subdued, although there may be some pick-up in apparent demand because there is a limit to how much destocking can be done. The demand outlook for copper faces headwinds from Japan and the BRIC countries too – their economies are suffering. Export demand is weak while Europe remains in the doldrums.

Another problem for copper remains strong substitution. The price differential in recent years has encouraged manufacturers to use other materials, notably aluminium, where possible. Copper lost ground in plumbing six years ago and now is losing market share in wire, cable and heat exchangers. With copper still 290 percent more expensive than aluminium compared with 75 percent on average between 1981 and 2010, the incentive for substitution remains alive.

With prices pulling back, it will be interesting to see what the uptake of copper exchange-traded funds (ETFs) is like. We have long argued that whereas would-be investors might be put off by the cost of warehousing and insuring the metal, this would become less of an issue at lower copper prices – investors would be more likely to be prepared to buy copper ETFs if they viewed the copper price as cheap. As such, we feel the presence of ETFs will help support copper prices now they have moved down below $7,000 per tonne. Again, the market will need to consolidate and regain its composure.

The overall view for 2013 is that the copper market will be broadly balanced. We expect a supply surplus to develop but it is likely to be small enough to view the market as balanced; however, the surplus is expected to grow in the years ahead when new projects at an advanced stage of development are commissioned.

In the near term, much will depend on how demand recovers, especially in China, and how tightly held the copper stockpiles are. With this in mind, we note how quickly cancelled copper warrants have climbed on the LME since early March. They stood at 155,375 tonnes on April 15, up from 24,875 tonnes at the beginning of March.

The US will also be a key area – it is currently a bullish aspect to the outlook. Avoidance of the fiscal cliff and sequester opens the way for a sustained recovery but with many decisions about the debt ceiling still to be made the outlook for the year as a whole is still uncertain. If handled well, the US recovery could really gather momentum and provide a strong lift to global demand.

Copper Price Outlook 2013In summary, the outlook for demand in 2013 is stronger than it was in 2012. We expect the US recovery to gain momentum and we still expect a Chinese recovery to start, which will lead to restocking. The drag factor remains in Europe – we would not expect too much cheer from this region but, if it can avoid another crisis, stability there would be a welcome development – although that might be expecting a lot.

FastMarkets Q1 2013 Copper Report Conclusion

Copper has had some of the tightest fundamentals of all the metals in recent years, which is no doubt why prices have managed to hold so far above the marginal cost of production. On paper, the market looks set to move into a supply surplus in 2013, which should in theory put downward pressure on prices; indeed, that seems to have been unfolding in recent months.

But supply surpluses have not led to downward spirals in other metals and we think producers, traders and warehouse companies have become adept in keeping surpluses off market. We expect the same phenomenon in copper now – indeed, the run-up in cancelled copper warrants may be the start of this.

Our outlook for 2013 assumes that China will move from a situation where growth has been slowing to one where infrastructure spending and urbanisation gives the economy a boost, while the US recovery is put on more stable grounds and continues to gather momentum – the US auto industry is already recovering strongly. China’s auto sales are following suit and the US construction industry is building momentum too.

On balance, we expect good scale-down buying interest to emerge once the current bout of weakness has been contained at prices below $7,000 and would watch for signs of consumer restocking in China and the US. Even without restocking per se, we feel apparent demand will pick up in all regions in 2013 as destocking ends. Prices have already dipped briefly below $6,900 and support was encountered in the face of large scale stop-loss selling and position liquidation.  The market is now considerably less overbought than has been the case in recent months and therefore any upsurge in buying interest will be more intense.

Looking further into 2013, the prospect of a supply surplus of some 270,000 tonnes should keep prices capped but further supply disruptions, combined with less liquid stocks and possible consumer restocking in China and the US, may well absorb more of the surplus.

Prices averaged $7,928 in the first quarter; because this first-quarter average was lower than expected, we have revised down our forecast for the 2013 average to $7,700 from $8,200. In the second quarter we expect prices to spend most of the time in the $7,000-7,600 range.

Global supply/demand balance in refined copper (million tonnes)

2008 2009 2010 2011 2012(e) 2013(f)
Production 18.24 18.25 19 19.65 20.05 21.05
Consumption 18.05 18.09 19.38 19.87 20.38 20.78
Balance +0.19 +0.17 -0.38 -0.22 -0.33 0.27
Price $6,969 $5,155 $7,535 $8,810 +$7,946 +$7,700

Sources: ICSG, FastMarkets.com forecasts

For this quarter the volatility experienced in recent days has raised a huge question mark over price movements, which are not responding to fundamental news. The Force Majeure at Bingham has been completely ignored, as have the labour issues at the Chilean ports and potential labour problems later in the year amongst the mine workers in Chile and at Grasberg.

As and when the market stabilises these factors will start to exert upward pressure on prices and provide further stimulus. So, for this quarter we will no doubt endure a period of price volatility at these lower levels, probably followed by an improvement as we move towards June. In the meantime, we could see spikes down to the $6,625 area but feel these will be short-lived and later in the quarter we could see a recovery up into the $7,500-$7,800 area.

Will Adams

About Will Adams

William Adams has been involved in the metals markets since 1982 – he has experience in many areas of the market from researching to trading and has worked in London, New York and Tokyo.