October 24, 2019 / 1:23 PM / 19 days ago

Column: Copper Study Group slashes both supply and demand forecasts

LONDON (Reuters) - The International Copper Study Group (ICSG) has taken the red ink to both sides of this year’s copper market balance equation.

Copper concentrate is stockpiled in Punta Chungo port that is used to export copper from Antofagasta Minerals' key Los Pelambres Mine, north of Santiago July 7, 2010. REUTERS/Victor Ruiz Caballero/File Photo

Global consumption is now expected to register anaemic growth of just 0.3% this year, compared with the Group’s May assessment of 2.0%.

Supply is expected to fare even worse.

The net outcome of these adjustments is a widening of the Group’s forecast supply deficit this year to 320,000 tonnes, from the 190,000 tonnes estimated in May. Next year’s expected balance has been flipped from a deficit of 250,000 tonnes to a surplus of 281,000 tonnes.

These headline findings should be interpreted cautiously given the statistical problems of calculating a supply-usage balance in a 25-million-tonne market.

“ICSG recognizes that global market balances can vary from those projected owing to numerous factors that could alter projections for both production and usage,” the Group warns, adding, “actual market balance outcomes have on recent occasions deviated from ICSG market balance forecasts.”

With that important caveat the ICSG’s twice-annual market update captures copper’s confusion this year, the price having been trapped between macroeconomic negativity and bullish micro supply-chain dynamics.

GLOBAL SLOWDOWN HITS DEMAND

London Metal Exchange three-month copper recorded its year-to-date high of $6,608.50 per tonne back in April.

Any bullish exuberance has since been snuffed out by mounting evidence of weakness in global manufacturing.

Copper is today trading around $5,900 per tonne, barely changed from year-start levels.

The ICSG pinpoints the two areas of maximum weakness, namely China and the European Union.

While underlying “real” demand growth in China may be running at around 1.5% in 2019, apparent consumption, a calculation based on China’s production and net trade, is expected to register a historically low 1.0% increase this year.

Nor is there much prospect of a significant pick-up next year, the ICSG forecasting both “real” and apparent usage to grow by a similarly low-ball 1%.

“EU usage is significantly lower than previously anticipated due to a weaker economic environment negatively affecting different end-use sectors combined with the dampening effect on cathode demand of good scrap availability,” the ICSG notes.

The outlook for Japan, meanwhile, “remains sluggish” and although U.S. demand is growing, it is expected to level out next year.

The Group forecasts global usage to pick up to 1.7% growth next year, but it’s obviously a moving target, not least because of the trade tensions between the United States and China.

MINE PRODUCTION TO FALL

At the time of its last meeting in May, the ICSG forecast world mine production this year would be no better than flat relative to 2018.

It now expects output to fall by 0.5% as the list of supply disruptions lengthens.

Mine supply was always going to struggle this year, reflecting in particular anticipated low output at the Grasberg and Batu Hijau mines in Indonesia.

But the surprise has come from the African Copperbelt countries of Zambia and the Democratic Republic of Congo.

“The Group’s forecast for African mine and refined production is significantly lower than its (May) forecast as a consequence of recent announcements regarding suspensions at SX-EW (solvent-extraction-electrowinning) mines, reductions in planned production and temporary smelter shutdowns.”

The ICSG forecasts a return to 2% global mine production growth next year, factoring in an allowance for disruptions, but that may yet prove optimistic.

It’s worth noting that many analysts think production will fall even harder this year, with a possible knock-on impact on next year’s anticipated levels.

REFINED METAL CONSTRAINTS

The most dramatic of the ICSG’s revisions since May is the forecast for refined metal production.

Global output is now expected to rise by a meagre 0.5% this year, compared with a previous projection of 2.8% growth.

What the ICSG describes as “an unusually high number of smelter disruptions and temporary shutdowns” has severely constrained refined copper output this year.

The hit list includes Africa, where production has been affected by smelter outages and closures of straight-to-metal SX-EW mines, the EU, Japan and the United States.

Indeed, production outside China is expected to contract by 2.5% this year, meaning all the growth will come from China’s smelters.

Based on its forecast for improved mine supply next year, the ICSG is looking for a 4% bounce-back in global refined output in 2020.

Here too, though, there is plenty of uncertainty in the mix, particularly regarding the Tuticorin smelter in India and Chilean state producer Codelco’s operations.

Tuticorin has been out of action since May last year, when environmental protests turned deadly and the local government ordered the plant to close. Vedanta Ltd is still trying even to get access to the smelter to check its current state.

Codelco, meanwhile, has been upgrading its smelters to meet new Chilean environmental standards and is considering closing the Ventanas smelter rather than investing in further measures to meet the next round of yet tougher regulations.

UNCERTAINTY RULES

The ICSG’s biannual forecasts are always beholden to events, as the Group itself concedes.

But rarely has there been such uncertainty in every component of its calculations.

Copper mine supply has a history of unpredictability but refined metal production has tended to be much more stable in the past. The scale of disruption at this stage of the supply chain is near unprecedented, instilling an extra element of volatility into the bigger supply picture.

The demand outlook, meanwhile, is dependent on the two imponderables of Chinese stimulus, surprisingly metals “lite” so far, and the on-off Sino-U.S. trade talks.

Generating a hard market balance estimate is particularly tricky right now.

And it looks as if it’s going to remain tricky for the foreseeable future, given the number of unknowns in the mix.

The copper market has spent the last few months trying to work out whether it should be trading deteriorating demand prospects or bullish supply-side underperformance.

The ICSG’s assessment of the current state of play suggests Doctor Copper’s confusion will not lift any time soon.

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

Editing by Dale Hudson

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