Copper, Still Falling But For How Long?

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Analysts and, indeed, investors are having trouble reading the copper market next year. The assumed wisdom has been that this year’s 94,300 metric ton surplus will balloon to 350,000 metric tons next year as new mine supply floods a market showing every sign of slowing demand, particularly in China which consumes 44% of global of production, or so a recent Reuters poll stated.


However, the same article also pointed out the bottleneck in smelter capacity could yet undo these predictions and went on to suggest that for a number of reasons refined metal supply may not turn out to be as plentiful as many are expecting. In the short term this is not expected to have any impact on prices, which most agree could show further weakness this year in spite of the seasonal Q4 increase in Chinese consumption adding to the demand side of the equation.

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Concerns have been raised that the flood of mine supply from Chile, the source of around a third of global ore supply, may not prove as strong as had been expected, indeed forecasts have already been reduced twice this year as a combination of short term factors such as at Codelco, the world’s top copper producer, having problems with a key piece of equipment designed to remove arsenic from ore at its new Ministro Hales mine, leading it to cancel some sales to China.

Elsewhere in Chile, delays to mine expansion and new projects coming on stream in the medium term could further slow new supply. Chile’s copper production has risen from 5.41 million tons in 2003 to 5.78 million last year and is forecast by Codelco to reach 6.23 million next year but Juan Carlos Guajardo, head of CESCO is reported by Reuters as saying “Next year and towards 2016 we will see the peak of production in this decade but I don’t think we will see very significant increases in Chile until the next decade, when we hope large projects in the pipeline will be unblocked.”

He sees production falling off sharply after 2016. All producers are facing problems, a mix of falling ore grades, rising taxes, worker and local community unrest and lack of power at competitive prices are causing problems for most producers in South America. In additio,n the arsenic problem both from some Chilean sources and Chinalco’s Toromocho mine in Peru will see refiners push up TC/RC charges in this week’s LME negotiations for 2015 rates. Smelters need to mix or blend such ores with those from low arsenic sources to achieve an acceptable refined product, something most miners have to accept the smelter handling and penalizing them with higher charges. The stand-out exception is Glencore which largely achieves its own blending as the world’s largest copper trader and achieves better average pricing as a result.

Bears will point to the resumption of exports from Indonesia as Freeport McMoRan‘s Grasberg and Newmont Mining‘s Batu Hijau mines in Indonesia, have been permitted to resume raw material exports but in the opinion of Stefan Boel, a member of the executive board at Europe’s largest refiner Aurubis, a bottleneck in smelter capacity, particularly in China, will contain the increased mine supply as smelter raw material stocks rather than refined metal.

Smelters will push up TC/RC charges as miners bid for smelters to refine their product and smelters in turn will struggle to secure sufficient scrap to make up a viable balance in their refining process. Low copper prices have already hit scrap prices this year, a situation that will get worse if prices fall further. We would expect smelters to talk up shortages and we would expect miners to point out supply side problems, both have an interest in talking up prices or downplaying surpluses, but copper supply has persistently underperformed in recent years and much will depend on demand in China and recovering mature markets next year.

The mood in Europe and Japan is not optimistic with both potentially slipping back into recessions. The US, for now, is recovering strongly, but not strongly enough for the Fed to push up rates suggesting the economy is still fragile against a slowing global backdrop. China grew at 7.3% in official figures released this week, its slowest pace since the global financial crisis in the September quarter and risks missing its official target for the first time in 15 years. Growth was dragged down by the property sector in spite of a pick up in factory output, a situation that is unlikely to change this year as significant stimulus will run counter to Beijing’s medium-term intention to rebalance the economy.

Back to those analysts, the current collective best guess is an average price for 2015 of $6,724.03 per metric ton, compared to a current price of about $6,560.00 per metric ton, so surplus or no analysts are not expecting a price collapse next year.

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