Copper: Is There Less Supply? Or More Demand?

There appear to be 2 bright spots on the copper market landscape on which producers and analysts are focusing.

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The first is the possibility miners will cut back production sufficiently enough that raw material supply will become restricted and, as a result, prices will stabilize and then rise next year.

Glencore has announced the temporary closure of 300,000 mt of production capacity in the Democratic Republic of the Congo and Zambia and there has been talk about output cuts in Chile.

Reuters reported the country’s second-largest copper mine, Collahuasi, owned by Anglo American and Glencore, planned to cut output by 30,000 mt. But, in truth, we are unlikely to see a massive curtailment in supply, not like the 700,000 mt we saw back in the late ’90s and early 2000s, simply because the supply market is so fragmented now, making it tougher to orchestrate wide-scale cutbacks.

According to Goldman Sachs, the top 5 producers control only 35% of global production, compared to iron ore, where the top 4 producers control more than 60%. At the same time that cutbacks appear here, increases appear somewhere else. Copper output in Peru, the world’s third-largest producer, rose 30% in August, according to the paper.

Wither Demand

Meanwhile, demand is softening further. Data last week showed activity in China’s factory sector shrank again in September as demand softened at home and abroad. Goldman Sachs forecasts no copper demand growth in the country this year. Nor are other emerging markets likely to provide the boost China’s cooling demand has lost, China consumes 45% of the world’s copper compared, say, to India that consumes just 2%.

So if supply cuts hold out only limited scope for supporting the copper price what else could make a difference? Well, back to China and the long-anticipated stimulus that commodity producers have hoped Beijing would instigate looks like it may be much more targeted than previous programs.

China’s Power Plan

Copper producers are pining their hopes on power transmission as the next big thing for the copper market, saying China will spend at least 2 trillion yuan ($315 billion) to improve its power grid infrastructure over the 2015-2020 Five Year Plan period, according to another Reuters article that cites government sources.

Apparently, despite falling power consumption growth, China is working to upgrade its cross-country power transmission capacity in order to reduce coal consumption along the smog-hit eastern coast and provide markets for energy producers in the resource-rich far west, where local electricity demand is considerably weaker.

The paper says China has already built long-distance ultra-high voltage power lines connecting giant thermal power and hydroelectric stations in the west to eastern coastal regions like Shanghai, but now needs to extend them even further. The 2015-2020 investment, it is hoped, will provide a boost for copper consumption.

Demand from the power sector accounted for nearly half of China’s estimated 8.7 million metric tons of refined copper consumption last year, Reuters says, with more than 1 mmt of it used in power transmission alone. So far this year, investment in the sector is very slightly down compared to last year but the State Grid is said by the Financial Times to have issued new tenders in anticipation of greater investment in the next five year plan.

Copper or Aluminum?

The fly in the ointment for copper producers, though, is the switch to much cheaper aluminum, both for power transmission and factory and city distribution networks. Switching to aluminum alloy could potentially add up to 1m tons of additional aluminium alloy demand, substantial but not enough to put a dent in the country’s massive over capacity.

It is roughly half as expensive to wire up factories with aluminum alloy as it is copper, making the switch attractive for cost-conscious Chinese manufacturers. Even though the FT reports the shift will be expensive in the long term, since aluminum alloy deteriorates faster than copper.

Not surprisingly, there is furious lobbying going on in China between copper and aluminum producers. Apparently both industries are appealing to nationalism. Domestic aluminum smelters point out that China is a net importer of refined copper so substitution can help bolster Chinese industry and reduce imports.

In addition, China has plenty of excess aluminium capacity, although 1 mmt of additional aluminum demand will not put much of a dent in up to 8m mt of excess aluminum-smelting capacity – depending on whose figures you accept.

The copper industry counters that investments by Chinese miners overseas mean that, globally, Chinese corporations control more reserves of copper ore than of bauxite, the FT says. To be fair 1 mmt of copper demand would have a much more profound impact on the copper market than the additional aluminum demand on the aluminum market – if that is Beijing’s desire. You have to ask, though, why would Beijing want to push up prices for cables? It will simply make the infrastructure projects more expensive.

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Simple economics is likely to win and with aluminum so much cheaper on a per-project basis. Both the National Grid and local municipalities and factories are likely to favor aluminum. Still, any increase in copper demand due to the power industry would no doubt be welcome, particularly if the disparate copper miners can achieve some level of coordination and actually deliver meaningful cuts rather than the simple closure of high-cost production we have seen so far.

This article has been amended following clarification from the International Copper Association of its cable market estimates

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