(The opinions expressed here are those of the author, a columnist for Reuters.)
By Andy Home
LONDON, Dec 11 (Reuters) - The bears are ascendant in the copper market.
On the London Metal Exchange (LME) three-month metal has this month hit its lowest level since June 2010.
Never mind that LME stocks are still low and tightly controlled by a dominant long position-holder. Never mind that the front part of the LME curve remains correspondingly tight with the cash-to-threes period CMCU0-3 still in backwardation to the tune of $60.50 per tonne as of Wednesday’s valuations.
The bears are betting all that will change as a surge in mine production travels down the supply chain to tilt the refined market into surplus.
It was supposed to happen this year, but it didn’t. Next year, though, the bears argue, will be different.
It’s a view apparently borne out by the terms of the copper concentrates supply deal between Freeport McMoRan and Chinese smelters.
What looks set to be the “benchmark” for 2015 includes a treatment charge of $107 per tonne and a refining charge of 10.7 cents per lb. These charges, deducted from the copper price for the cost of converting raw material into metal, are the highest seen since the middle of 2005.
The inference is that after years of famine the time of copper feast has finally arrived.
But then that’s what everyone thought this time last year. Could supply disappoint again next year?
There are already plenty of warning signs that copper has lost none of its perennial ability to spring surprises on the unwary.
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Graphic on "benchmark" annual concentrate treatment charges: link.reuters.com/wam63w ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
The first wall of new copper supply actually came in 2013, when mine production grew by 8 percent, according to the International Copper Study Group (ICSG). It was the fastest growth rate in many, many years.
However, rather than rolling into 2014, that supply surge has faltered. At its October meeting the ICSG slashed its 2014 forecast growth figure from 4.7 percent to just 2.6 percent.
That reflected major disruptions such as the temporary ban on concentrate exports from Indonesia, where production slumped by 20 percent in the first eight months of the year.
Such disruptions had been a defining characteristic of the copper market up to 2013, a year when just about everything went right at the world’s biggest copper mines.
That year, however, is looking increasingly like an outlier, because copper supply is showing every sign of reverting to its previous problematic norm.
Analysts are already taking the red ink to their 2015 supply forecasts as key producers cut their guidance and unexpected outages accumulate.
Rio Tinto, for example, has forecast a drop in output to 500,000-535,000 tonnes from a targeted 615,000 tonnes this year, mainly due to remediation work at its Kennecott Utah mine, which experienced a major landslide last year.
BHP Billiton, meanwhile, has warned that grades will fall by 24 percent at its Escondida mine in Chile in its financial year running from July 2015 through June 2016.
The company has been a bit coy with exact figures, saying it hopes to mitigate the grade hit with increased efficiencies. Moreover, the decline in grade will be temporary with production in 2015-2016 representing a low point for the next 10 years.
But Escondida, remember, is the world’s largest single mine and its period of low-grading will directly impact availability over the second half of next year.
Freeport’s Grasberg mine in Indonesia is still operating at just 80 percent of capacity. The flow of concentrate exports was resumed in August but a return to normal service has been hampered by worker protests following a fatal accident in October.
Indeed, industrial unrest in the copper sector appears to be making a comeback after several years of relative calm.
The Antamina mine in Peru is experiencing its second walk-out in the space of a month.
Also making an unwelcome return for miners are unexpected hits such as a fire at the Oyu Tolgoi mine in Mongolia, where this year’s guidance had already been cut due to development delays, and a loss of power at Nevsun’s Bisha mine in Eritrea.
Analysts have got used to making an allowance for such disruption in their supply forecasts. The ICSG for one is still predicting 7.3-percent growth for 2015 after “adjusting using historical disruption factors”.
But it’s still disconcerting that some of that disruption allowance is being filled even before the new year has actually started.
Such is the stuff of copper markets past.
But there is also a new factor in play, complicating the interaction between mined and refined production.
Many of the new mines currently coming on stream are producing concentrates with high levels of impurities. Arsenic is a particularly problematic by-product given Chinese smelters face strict import restrictions on high-arsenic material.
Codelco’s Ministro Hales mine is the problem poster child of this new generation of “dirty” concentrates producers.
The Chilean state-run company has been buying in “clean” concentrates for blending at a facility in Taiwan operated by concentrates trader Ocean Partners.
Others are either doing the same or selling material to third-party traders for blending.
The requirement to blend material before it can be sent to smelters has injected a totally new level of complexity into the copper supply chain.
It is why that 2013 mine surge failed to translate into refined metal surge.
Much of the extra supply simply went into building up stocks through the raw material supply chain, whether at blending operations or at smelters themselves.
Whether the resulting “bottle-neck” was a one-off or will be a continuing feature of the copper supply picture is a hotly-disputed topic among analysts right now.
At the very least it will complicate an already non-linear flow-through from mine availability to refined metal availability.
It would still be a brave analyst to forecast anything other than concentrates surplus and resulting refined metal surplus next year.
But the figures are already being whittled lower. And as they are, the expected cushion against further disruption grows thinner.
Of course there are other factors in the bearish mix pressuring the copper price lower, not least concern about slowing growth in China, the world’s engine-room of copper consumption.
But supply surge is the drum-beat to which the bears are marching. It’s now up to the miners to deliver that surge and all the recent evidence suggests it’s not going to be as straightforward as many assume.
Surplus has been a curiously elusive thing in the copper market over the last couple of years and it might not be the racing certainty that many expect for next year either. (Editing by David Evans)