October 7, 2015 / 2:13 PM / 4 years ago

COLUMN-Copper's outlook may be rosier than you thought: Andy Home

(The opinions expressed here are those of the author, a columnist for Reuters.)

By Andy Home

LONDON, Oct 7 (Reuters) - German copper producer Aurubis has just rung the bell on the start of the “mating season”, the annual negotiation of term contracts for shipments in the following year.

It has announced it will be reducing its copper cathode premium from $110 per tonne over LME cash metal this year to $92 next year.

Aurubis’ preemptive move will raise expectations of a similar-sized reduction in the annual premium from Chile’s Codelco, the world’s largest producer. Its European premium has been higher than that of Aurubis in both 2014 and 2015 at $112 per tonne.

The case for cutting copper premiums seems obvious.

Everyone’s worried about the state of demand, particularly in China, which accounts for around 45 percent of global copper usage. The price itself looks wobbly. Currently trading around $5,250 per tonne, basis LME three-month metal, it is already down by around 16 percent so far this year with plenty of bears calling for lower prices still.

But copper has a habit of confounding the consensus view and Aurubis may have wished it had stayed its hand until it saw the latest forecasts from the International Copper Study Group (ICSG).

The group has slashed its April forecast for a 364,000-tonne surplus this year to just 41,000 tonnes. And rather than expecting another 228,000-tonne surplus next year, it is now projecting a 127,000-tonne supply deficit.


So what’s changed since the ICSG last met in April?

Well, pretty much everything, it seems. Or as the group puts it, “the revisions reflect substantial changes in market conditions since April 2015.”

The slowdown in China is folded into a major downwards revision of the ICSG’s estimate of global demand this year from growth of 0.6 percent to a 1.2-percent contraction.

“Apparent usage” is expected to be flat in China. “Apparent usage” is a calculation based on Chinese production, changes in visible stocks and net imports.

Real usage is a different thing altogether and one that is extremely hard to calculate. But the ICSG notes that “underlying ‘real’ demand growth in China is estimated by others at around 3-4 percent”, down from a figure of 4.5-5.0 percent used back in April.

The implication is that the gap between “apparent” and real usage will be filled by drawdowns of non-reported stocks, such as those in bonded warehouses in port cities such as Shanghai.

As for next year the ICSG has trimmed only very marginally its assessment of global usage, including “apparent usage” in China, to 3.0 percent from 3.1 percent in April.


Quite evidently, if the ICSG has reduced its 2015 surplus forecast and its usage forecast, something big must have changed on the supply side of the equation.

And it has. But not, maybe, in the obvious way.

The group has cut its growth forecast for mined production this year to just 1.2 percent from its April forecast of 4.4 percent and for next year to 4.2 percent from 5.1 percent.

So far, so uncontroversial.

Copper mine supply has been something of a car crash this year.

Major producers such as BHP Billiton and Rio Tinto came out with significant reductions in production guidance at the start of the year.

Since then there has been a long, long list of unforeseen supply hits ranging from labour unrest in Chile, through bad weather just about everywhere and chronic power shortages in key African producing countries such as Zambia and the Democratic Republic of Congo (DRC).

More significantly for refined metal market balance, though, is the cut the ICSG has made to its refined metal production forecast. This is now expected to grow by just 0.8 percent this year, compared with 7.0 percent last year and an April forecast of 4.1 percent.

Refined production is usually more predictable than mined production because it is less prone to the host of technical issues associated with mining.

But this is where the other “substantial change” in market conditions kicks in, namely price-related cutbacks.


The decline in the copper price is generating a growing number of casualties.

Most of the full closures have been among small operators with high costs such as Aura Minerals’ Aranzazu mine in Mexico, Revett Mining’s Troy mine in the U.S. and First Nickel’s Lockerby mine in Canada.

Far bigger in terms of tonnage and market impact are the voluntary curtailments announced by the likes of Glencore , Freeport McMoRan and Asarco.

And just about all of these have been cuts to leaching operations at mines. Leaching, or to give it its proper technical name, solvent-extraction-electrowinning (SX-EW), is a technology that allows mines to produce metallic copper without the need for separate smelting and refining.

Glencore’s 400,000 tonnes of cuts in Africa comprise SX-EW capacity in the DRC and conventional smelter capacity in Zambia.

Freeport’s 136,000-tonne annual cuts at its U.S. mines and its El Abra mine in Chile are all in the form of leaching capacity.

And the same with Asarco’s 30,000 tonnes of cuts in the U.S. and for the 30,000 tonnes of cuts just announced at the Collahuasi mine in Chile.

Global SX-EW production is forecast by the ICSG to fall by 4 percent this year and by another 4 percent in 2016 on the back of these cutbacks.

It’s this component of the supply picture that has changed most over the last few months, leading to the ICSG recalculating its estimates for supply-demand balance for both 2015 and 2016.


The market impact of these cuts is amplified by the fact they affect immediately what happens to the refined copper balance rather than having to be transmitted, possibly imperfectly, via the smelting stage of the supply chain.

And, as the ICSG has just shown, that refined copper market balance suddenly doesn’t look as overwhelmingly bearish as it did.

Now, as the group itself admits, “global market balances can vary from those projected owing to numerous factors that could alter projections for both production and usage”.

And the difference between a 41,000-tonne and a 364,000-tonne surplus is almost within the margin of statistical error in a near 23-million tonne global market.

But the broader shift in trend since the ICSG’s April meet is significant and that trend is towards lower surplus and possible deficit next year.

Maybe producers cutting their 2016 term premiums isn’t so obvious after all.

Editing by David Evans

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