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A brighter year for copper?

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After a challenging year in 2019,there is some hope that the coppermarket could improve in 2020,helped by somewhat better
market sentiment. That is supported by what appears to be a de-escalation of trade tensions on the back of the US-China Phase 1 trade deal and expectations that global manufacturing activity, including in certain copperintensive end markets, could be improving.

Copper supply continues to be tight – albeit not as tight as it was last year, given optimism that there will be fewer mine disruptions this year. This has led some industry observers to say that it is likely that the current market deficit could grow this year and place at least modest upward pressure upon copper prices, assuming there are not any unforeseen circumstances that will change the balance or the market sentiment.

“Even though it was in deficit, 2019 was a real disappointing year for the global copper market,” especially in the second
half of the year, John Mothersole, director of research for IHS Markit’s pricing and purchasing service, said. He noted that it was marked by a combination of both soft manufacturing activity and a high degree of inventory destocking. That, Fastmarkets MB analysts report in the Base Metals Tracker, was at least partially the result of the lingering US-China trade conflict.

Demand drivers

As a result, according to the latest data from the International Copper Study Group (ICSG), global refined copper usage was essentially flat – only up 0.15% – year to date through October, after increasing by 3.3% to 24.5 million tonnes for the full year in 2018. Carlos Risopatron, ICSG’s director of economics and environment, pointed out that refined copper usage has also been negatively impacted by the increased availability and lower-price copper scrap outside of China, given the inability to export most grades of scrap into China.

Geordie Wilkes, head of research for Sucden Financial, said that refined copper consumption is expected to increase by about 1% in 2020, helped by Chinese investment in 5G wireless technology and such infrastructure as high-speed rail, both of which are very copper intensive. China is said to account for 50-55% of global refined copper consumption.

While there are clearly differences by region, Michael Widmer, a commodities strategist for Bank of America Merrill Lynch, said that copper demand growth was weaker than desired in most of the major regions of the world last year. In fact, while China had difficulties stimulating its economy, and therefore copper consumption, copper demand actually contracted in Europe and growth in the US was also slower year on year.

Fastmarkets MB analysts said that, even though the recent recovery in the global manufacturing purchasing managers index (PMI) has been somewhat shallow, it is encouraging that it ended last year in positive territory with a reading of 50.3% after it bottomed out at 49.3% in July – its lowest level since October 2012, with the Phase 1 trade deal seemingly boosting business confidence. This, Widmer observed, comes as the Chinese manufacturing PMI moved up to 50.2% in December, which he said is a good sign, as it had been below the 50% breakeven point between contraction and expansion for a good part of last year.

In 2019, Chinese copper demand was 12 million tonnes, Wilkes says. “That could increase to about 12.5 million tonnes this year, even though Chinese GDP growth has been somewhat disappointing – only 6.1% in the fourth quarter. He said the rate of growth will depend upon China’s investment in the grid and housing completions, calling 5G investment perhaps the biggest driver. Also, he said that last year the Chinese government used infrastructure investment to attempt to elevate its economic growth and plans to continue doing so this year.

One thing that was especially disappointing last year, and that had a negative impact upon copper demand, Mothersole
pointed out, was China’s investment in the state electricity grid. ICSG’s Risopatron agreed, noting that most of copper use is for wire and cable.

But while there has been a lot of caution in China about spending on the grid, Widmer said the spending has actually been patchy, first increasing 30% year on year in November 2018 and then contracting by about 15% year on year by the second quarter of 2019.

Wilkes said that Chinese investments in the state grid were down last year, which weighed on copper demand in 2019. He
added that this year’s state grid investment will be a leading indicator for Chinese copper demand, noting that some reports suggest that such investmentcould be down $19 billion in 2020. He said that in coming years, however, such investment, which is aimed to assist with increases in renewable energy, is likely to pick up, given China’s desire to transition away from a fossil-fuel-based economy.

Automotive trends

Wilkes observed that last year was not a good year for Chinese auto sales, with destocking limiting the need for new vehicle output. Mothersole maintained that the real disappointment in the Chinese auto sector was for electric vehicles (EVs), which saw a drop in sales because of a decline in state subsidies for those vehicles.

Mothersole said that move was in response to the recognition by policymakers that the Chinese auto market is too fragmented and is in need of consolidation to make it more efficient and better able to meet some of the social initiatives that the government has staked out. Those include the desire to increase EV production and sales as a way of combating climate change and reducing oil imports. He said, “While the Chinese government has been promoting the building of some of the infrastructure associated with EVs, such as charging stations, direct subsidies have been reduced and/or eliminated.”

Wilkes observed that pure EVs contain an average of 80 kg of copper, by contrast with about 23 kg for an internal combustion engine vehicle and that, according to the Energy Information Administration China, accounted for about half of the EVs worldwide as of 2018.

Mothersole said the growing disfavor for diesel-powered vehicles has been hurting the European – particularly German
– auto sector and European copper consumption overall, which he estimated to have declined by as much as 5-7% in 2019.

Regional uncertainties

Wilkes said that European copper demand has been down, given that the region’s economy has been weak and is not expected to gain much traction in the near term, although stimulus by the European Central Bank (ECB) could help. He noted that the European manufacturing PMI was in contraction for most of last year and was only at 46.3% in December. He noted that while it is not quite as bad as it had been, the German automotive market remains in decline and is not likely  to see a strong turnaround soon.

But while European copper demand will likely remain soft in the first half of this year, Mothersole predicted that it could improve, albeit only modestly, later in the year, helped by more clarity about Brexit and the slow positive cumulative effect of quantitative easing.

“The US copper demand has held up better than that in many other regions given the resilience of its economy,” Wilkes observed, adding that has been helped by a recent surge in US housing starts.

“Also, the removal of some of the uncertainty on the trade front with the Phase 1 deal could help to improve business confidence and consumer confidence,” he maintained, although he doubted that it will be followed up with a Phase 2 deal anytime soon. Also, since 2017 US auto market sales have been declining and it is unknown how quickly production will transfer from internal combustion vehicles to EVs.

Given that the Institute for Supply Management’s US manufacturing PMI has been in negative territory for five consecutive months, falling to 47.2% in December – its lowest level since June 2009 – Mothersole said he believes that US copper consumption growth will be a little slower; under 1% in 2020, by contrast with 1.8% in 2019.

Impacts of supply

Meanwhile, ICSG’s Risopatron said he believes that one of the most important developments in the copper market is not related to demand, but the fact that global copper mine production declined by 0.3% year to date through October, as he said it is rare for mine production to contract. However, he said that he does not believe that will be repeated this year. Rather, the most recent ICSG forecast, which came out in October, was for mine production to grow by 2% in 2020 and for global refined production, which was down 0.3% year to date through October, to increase about 4.2% this year.

Widmer said the largest loss of mine output last year was the 150,000-200,000 tonne decline in Indonesia due to the transitioning of Freeport-McMoRan’s Grasberg Mine from an open pit to an underground mine, with another major factor being mine disruptions that were the result of political unrest in Latin America, particularly Peru and Chile. There were also some disruptions in the Central Africa copper belt, particularly in Congo and Zambia.

The reasons for the disruptions are quite different from each other. For example, in Peru they were due to local discontent over trucking issues. In October, miners MMG and Citic Metals declared force majeure on copper concentrate supply contracts from their Las Bambas Mine after the roads leading to the mine were blocked.

Meanwhile in Chile, where copper mine production is down by about 7% year on year, it is a very different story. “It isn’t as much due to discontent with copper operations, but general political discontent, including that related to inequality,” Widmer said.

“If this situation continues this year the copper concentrate market could tighten further,” he noted, adding that this has also resulted in increased Chinese copper concentrate imports and lower Chinese smelter profitability. While, at least in the near term, China’s smelters continue to operate, Wilkes said that some could be at risk going forward.

Mothersole pointed out that there have also been declines in Central Africa, with mine production in Zambia falling 5-8% last year after that country instituted a new royalty and tax regime that made mine operational economics problematic, and mine production in the Democratic Republic of Congo falling by 3% because of the fragile political situation there.

Refinery factors

Meanwhile, it is a mixed picture for refined copper supply. Widmer observed that there has been a lot of refining capacity being built in China, with the mismatch of mine supply growth and melting and refining capacity keeping capacity utilization rates very low at smelters and refineries. “That is one reason that treatment and refining charges have been quite low,” he said.

There are other factors as well affecting refined copper, Risopatron pointed out, including that last year there were some unplanned outages at several smelters, including in India, South Korea and Chile, as well as some problems with
electrowinning plants.

Given these disruptions, Risopatron said the refined market is more dependent upon Chinese smelters, which could
possibly result in a growing refined copper deficit, depending upon what happens with demand, and how much copper scrap competes with refined copper outside of China, with scrap availability there increasing on the back of declines in exports to China.

Also, while they adjust in fits and starts, Mothersole said that refined copper inventories continue to be worked down and are likely to continue to be tight for at least the first two quarters of 2020, given the continued supply side weakness. Widmer agreed, noting that while inventories – both visible and unreported – are at a near record low, they will likely go lower: “We won’t run out of copper, as there is still a lot of copper lying around both in and outside of China, but the deficit will likely grow, possibly to about 153,000 tonnes from about 70,000 tonnes in 2019.” The deficit, however, could narrow somewhat in 2021 as more mine capacity comes online, Wilkes said.

Despite the deficit, Mothersole said copper prices were quite disappointing for much of 2019, even though there
was some early optimism, linked to expectations of an easing of trade tensions, which helped to lift LME prices to $6,400-
$6,500/tonne in the first quarter. Subsequently, prices dipped as low as $5,600/tonne in the third quarter, before moving back up to $6,000-$6,300/tonne in December and January.

Fastmarkets MB forecasts that it could average $6,400/tonne in the first quarter. That, however, could be affected by some future developments, including the potential impact of the Coronavirus in China and elsewhere in the world.

“Overall, the physical conditions in the copper market should improve in 2020 and 2021 with better, although not great, consumption growth,” Mothersole said. “That and continued sluggish supply-side growth argues for upward pricing pressure going forward.”

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