Attendees of our recent commodity conference in Chicago have heard about the growing surplus in the copper market. Discerning true demand levels for a commodity that has such a high financial role is hard, in part because a portion of apparent demand is not real but goes into inventory. If that inventory is on the LME or SHFE, then it is readily transparent. But if it goes into off-market stocks, as is often the case in China, then simple import figures make demand seem higher than it really is.
Even so, demand in China (the consumer of two-fifths of copper production) has remained robust, whereas in North America, demand is supportive if unspectacular. In 2014, even Europe may turn a corner after a stagnant 2013 in terms of copper consumption. Intriguingly, physical premiums have increased, suggesting that buying has been sufficiently strong to squeeze the market these last few months, regardless of whether it was for consumption or inventory. And this all feeds into the copper price.
At $105 USD per ton, Aurubis’ 2014 premium is 22% higher than the offer of $86 per ton it gave European customers this year. So the surplus in mine supply hasn’t yet had an impact on refined metal prices. Refiners are raising their treatment charges as an excess of concentrate meets a limited refining capacity.
As such, MetalMiner’s short term copper forecast shows an upward trend for the next two months, but the underlying fundamentals still support a lower price in 2014. Mine supply has increased, with investment at Escondida raising output from 814,000 tons in 2011 to 1.2 m tons this year, a 14% increase, as a Reuters report states.
Meanwhile, Freeport McMoRan’s Grasberg mine in Indonesia is expected to rise 8% this year and a further 5% in 2014. That is 100,000 tons more production this year than last. The game changer still to come is Rio’s Oyu Tolgoi mine in Mongolia. Third quarter production was 30,600 tons in concentrate, and the full year forecast is 75,000-85,000 tons.
The output, however, is going into bonded warehouse while Rio argues with the Mongolian government– so that production has yet to hit the supply market. Oyu Tolgoi is expected to add around 330,000 tons per year of copper in concentrate. And further expansion at Escondida will add another 100,000 tons next year.
The copper supply market tends to throw curve-balls. Actual production doesn’t always match what’s anticipated, so this year’s lack of disruption may not be the start of a more reliable supply future, although miners say that recent industry changes should reduce the frequency of future supply shortfalls. According to the FT, only 500,000 metric tons of disruptions (to the supply market) have been recorded in 2013. This is the lowest since 2004 and compares with an average of 900,000 tons in the period between 2004 and 2012.
“In essence, this is 400,000 tons of additional copper which may not have been expected to be in the market in 2013,” Macquarie analyst Colin Hamilton says, “Given the strength in demand without this element, copper would have been back in a decent deficit.” The World Bureau of Metal Statistics recently reported a copper surplus of 195,000 metric tons in January to August 2013, annualized as 292,500 tons, which follows a surplus of 236,000 tons for the whole of 2012 in their estimation. However, the WBMS does not estimate how much metal is going into off market inventory, particularly in China where it has been used as a collateral asset for loans, or CFC Financing, as Goldman Sachs refers to it.
So what does this mean? In the short term, probably a firming of the copper price, but concentrate surpluses are undermining the attractiveness of copper as an investment opportunity. Of the base metals, copper’s always been the most prone to financial sentiment. We maintain our position that prices will weaken in 2014, but volatility will continue, particularly if supply disruptions pick up next year, as history suggests they may.