So Much For Copper’s ‘Oversupply,’ Canceled Orders Are Leading A Comeback

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After a collapse in prices during the first quarter, base metals generally, and copper particularly, have staged a recovery. Nickel led the way and is still well ahead of the pack, but the fundamentals of nickel are so distinct from other metals that its rise is easily explained. However, copper recently touched a five-month high, so what is driving a metal that was expected to be in oversupply due to new mines this year?

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Copper_Chart_July-2014_FNLWell, first and foremost those new mines have not happened, or not happened yet may be more accurate. According to the World Bureau of Metal Statistics the copper market recorded a deficit of 286 kilotons from January to April 2014, which follows a surplus of 404 kt for all of 2013. Yet world mine production for January to April 2014 was 6.13 million tons the WBMS reports, 6.1% HIGHER than in the same period in 2013 while global refined production rose to 7.14 million tons. That’s up 2.7% compared with the previous year.

Supply rose but the market was still in deficit from a surplus carried over from last year. Contrary to expectations of a drop in demand from a slowing China, consumption actually remained robust as China’s manufacturing sector grew at its fastest pace in six months in June according to official and unofficial surveys. The economy responded positively to “China’s “mini stimulus” measures.

Secondly, that wave of new capacity has been more of a ripple. State copper commission Cochilco is quoted by Reuters this week saying that production from Chile, the world’s No. 1 copper miner, is expected to rise 3% to 5.95 million tons in 2014, thanks to the new Ministro Hales, Sierra Gorda and Caserones mines, but that figure is already lower than a previous view of 6.07 million tons due to mine delays. Miners have actively been seeking to reduce shipments as production has fallen short of expectations.

Codelco, the top Chilean miner,  is canceling a total of around 10,000 tons of refined copper Reuters says due to continued problems at its new Ministro Hales mine. That may only be about 3% of the firm’s 2014 contracted term shipments to China, but in a tight market the resulting switch to the spot market is showing up as support for prices.

Codelco, the miner, is said to have already canceled more than 7,000 tons so far this year. Nor is Codelco alone in making cancellations. BHP Billiton is said to have asked clients to delay shipments of refined copper in the third quarter with one company advising the firm had asked them to delay a 2,000-ton shipment of term metal due to arrive in Shanghai in August. Physical delivery premiums have risen more than 40% since  mid June to $130-150 per ton over the LME, Reuters reports. Another indication that the market is tight is the LME, warehouse inventories have fallen from nearly 700,000 tons to 159,300 tons this year.

Japanese miners such as JX Nippon Mining are reporting robust demand from China and weak refining creating a refined metal shortage. Shigeru Oi, the president of JX Nippon Mining, Japan’s top copper refiner, said he expects prices to rise another 11% this year from current levels as China’s refined output continues to fail to keep up with demand. A senior executive at Jiangxi Copper, China’s top producer of the metal, is quoted as saying the global refined copper market may see a deficit of about 600,000 tons this year.

Meanwhile the investment market is reported to be looking at base metals in general with more enthusiasm than we saw last year. The belief is investment funds are allocating more to commodities than they had been as prices have risen this year and base metals are seen as one way of taking a bet on continued growth in China.

Cochilco, unusually for a producer, is suggesting it will not last. The organization says Chile’s production will rise another 5.4% next year to 6.27 million tons and prices will fall back to $3.00/lb, but as Cochilco got this year’s shortfall wrong, their predictions for next year should be taken with a pinch of salt.

 

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