SMC Comtrade - Copper Gearing Up

Embed Size (px)

Citation preview

  • 8/14/2019 SMC Comtrade - Copper Gearing Up

    1/14

    CopperopperGearing up

    comtrade

  • 8/14/2019 SMC Comtrade - Copper Gearing Up

    2/14

    comtrade

    Rebuilding Momentum

    Contents

    Section 1

    Executive Summary 1

    Section 2

    Economic Trend and Key Economic Indicators 2

    Section 3

    Copper

    Resent price trend

    Copper premium to gain in Europe and US

    Spot copper TC/RCs around $50/tonne

    Scrap metal decline supports copper

    Demand

    Traditional demand drivers are likely to take charge again

    US housing and automobile sectors are likely to bottom out in coming quarters

    Surging Chinese demand

    Supply

    Raw material markets have tightened

    The supply pipeline

    Section 4

    Copper Market Outlook

    Demand summary outlook

    Supply summary outlook

    Our base scenario for Prices

    7

    3

  • 8/14/2019 SMC Comtrade - Copper Gearing Up

    3/14

    comtrade

    EXECUTIVE SUMMARY

    Rebuilding momentum

    While the majority were panicking and turning more bearish

    with the passage of each day, we noted that copper was giving

    an early warning signal of impending change.

    It is said that the economy usually mimics the copper markets.

    This could be seen again if we look at copper prices couple

    months back. While examining the copper charts, it appears

    that the economy and copper are trending in the same direction.

    Copper prices appears now to be closer to a bottom than a top,

    which also means that markets are also close to putting some

    sort of bottom, if one takes a long term perspective. Copper hasalso a tendency of putting in a bottom well in advance of the

    markets and the economy, and it provides an early warning

    signal of a potential change in market direction.

    During the last strong correction, which lasted from 2000 until

    early 2003, copper put in a bottom towards the end of 2002, well

    in advance of the markets and the general economy. Thus a

    change in direction here will provide the first signs of a turn

    around. If the Dow trades down to the 7200 ranges and or puts

    in a new 52 week low, while copper starts to trend higher, it will

    be a very strong long-term bullish sign.

    More over, there are now many positive sings that have

    resurfaced and are also providing the current market optimism.

    This optimism is also resulting in marking the best quarterly

    gains in most of the equity and commodity indices. Demand for

    safer assets is waning while Treasuries are loosing their shine.

    Short Term lending rates have dropped to their lifetime lows

    while financial institutions are now in a position to return their

    loaned capital. Many key leading economic indicators have not

    only reduced in their pace of decline but they are now showing

    sustainable signs of recovery.

    Commodities as an asset class, after a shaky start to the year,

    certainly look to be in favour again. The flagship metal in the

    base metals complex has already opened its innings on front

    foot. We have seen money chasing commodity indices since

    second month of this year, and we think this trend is set to

    continue over the remainder of the year and next year as well.

    This move will further supported by a weak dollar and improving

    metal fundamentals.

    Changes in LME prices since the start of this year

    Source: SMC Comtrade, LME

    Summary Annual LME Cash Prices and PricesForecasts, 2007-2011

    US$/tonne 2007 2008 2009 2010 2011

    Copper $7,290 $5,400 $6,000 $7,300 $8,800

    Source: SMC Comtrade, LME

    1

    Our base case scenario for prices

    Going ahead from here, we envisage copper prices have definitely made their bottom at around $3500/tonne and now it is notlong enough when copper once again resumes it's up trend. We remain dependent on China to lead copper demand, which now

    should also find support from the so far moribund metal demand from major consuming economies. Declining prices of US

    dollar and rising inflation in the days to come will provide a strong platform for the surge in prices from macro economic point of

    view. Our base case forecast is $6000/tonne in 2009 and $7300/tonne in 2010.

  • 8/14/2019 SMC Comtrade - Copper Gearing Up

    4/14

    Source: SMC Comtrade, Reuters

    The main event: The US housing sector is bottoming

    comtrade

    Strong reversal signs: They are picking up (ISM)

    Source: SMC Comtrade, Reuters

    Euro

    Source: SMC Comtrade, Reuters

    Participative rally

    Source: SMC Comtrade, Reuters

    Annual Industrial Production Growth Rates and Forecasts for Key Economies, 2002-2009

    Annual % Change 2004 2005 2006 2007 2008 2009

    USA 0.7 0.6 0.8 0.3 -2.2 -0.5

    Euro Zone 0.9 2.7 5.3 1.5 -12.3 20.2

    Japan 1.8 3.7 4.8 0.8 -20.8 -34.2

    Germany 0.3 4.6 7.4 4.9 -11.3 -20.4

    China 14.4 16.5 14.7 17.4 5.7 7.3

    India 8.9 5.7 13.4 8.0 -0.2 -2.3

    Source: SMC Comtrade, Bloomberg

    2

    Economic Trend and Key Economic Indicators

  • 8/14/2019 SMC Comtrade - Copper Gearing Up

    5/14

    comtrade

    COPPER

    The Red metal is gearing up for much bigger gains

    Improving global confidence, better economic data, committed

    Chinese government on new billions of dollars of expanded

    infrastructure projects, expected sharp rise in inflation in major

    consuming countries are some important characterize of global

    copper market.

    Prices are poised to rally from the current levels and are

    expected to breach $6000/tonne levels before Christmas.

    Supply side will also come into picture in later half of the year

    due to earlier closures of mines and ever-increasing concernsof lower ore-grade, especially in the American mines. These

    problems will especially emerge in the backdrop of improving

    global appetite for copper.

    Metal forward curve has entered as flat terrain from the second

    half of next year. Generally during this time this curve remains in

    a shape of a right tick mark due to seasonal demand

    momentum. The flatness of this curve is made by the market

    forces, in which no one is ready to pay forward premium giving

    the scenario of a sharp recovery in the global economy.

    Our base case forecast for prices is, therefore, that prices haveplateau at their current levels centered around $4500/tonne.

    They should start rallying after the current brief pause of five

    weeks towards $6000/tonne before Christmas. The aggressive

    stance is only the result of the underlying fundamental

    development in the copper market and an expected bounce

    back of copperdemand in China as well as outside China.

    In summary, our base case forecast is for annual average

    copper prices of $4400/tonne in 2009 and $6200/tonne in 2010.

    LME Cash and 3-month copper prices

    Source: SMC Comtrade, LME

    LME 3-month copper prices vs. cancel warrants

    Source: SMC Comtrade, LME

    Forward Curve

    Source: SMC Comtrade, LME

    3

  • 8/14/2019 SMC Comtrade - Copper Gearing Up

    6/14

    comtrade

    Recent price trends

    The global copper market ended 2008 in surplus after heavy

    destocking by major consuming countries and the worst ever

    financial meltdown since the great depression. Housing,

    infrastructure and transport combine for more than 55 percent

    of world copper demand have been the most adversely affected

    sectors. It took only six month for copper prices to fall from its

    record high levels of above $8900/tonne to below $2850/tonne.

    Since then prices have not only managed to hold on their

    grounds but have smartly managed to gain more than 70

    percent from there multi year lows in December 2008. This

    upward price journey started with a slight hint of global recovery,

    which now seems to be very obvious.

    Since its multi month lows, prices have moved smartly on back

    hopes of an early end of the global recession, China's strong

    performance in its manufacturing sector and declining LME

    warehouse stocks. Prices are expected to remain in an upward

    trend over the coming months. In fact, we warn they may be

    poised to a strong rally, helped by short covering.

    Copper premiums to gain in Europe and US on Chinese

    imports

    Copper premiums in Asia were steady this week, but the

    summer demand lull in China and rising availability in the

    world's biggest consumer of the metal mean warehouses in the

    region could again start to see deliveries. Of the entire LME

    stockpile in Asia -- 2,250 tonnes, equivalent to less than a

    quarter of China's daily consumption -- 13 percent is on

    cancelled warrants. There are just 25 tonnes of copper left in

    LME warehouses in Singapore and 2,200 tonnes in South

    Korea -- 0.7 percent of the global total -- in a region that

    consumes more than a third of the world's copper annually.

    Estimated premiums for copper in warehouses in Singapore

    were $160/180/tonne above the London Metal Exchange cashprices, which is also of a little change from past few weeks due

    to slowdown in the physical off, take of the metal, especially

    from China, which had been importing

    record monthly copper from past three months. So far China's

    has drawn in more than 1 million tonnes of copper cathode from

    around the world, twice the level of imports in

    the same period last year. This has also led in drying up the

    copper warehouse stocks from the Asian LME warehouses. We

    believe premiums will remain low in coming month in this region

    as well due to seasonal slowdown and the near ending of the

    government's restocking for construction projects but going

    ahead in the third quarter, scenario will improve with improving

    demand intake dominated by China. More over, the arbitrage

    window between Shanghai and London is now standing around

    LME cash and 3-month spread

    Source: SMC Comtrade, LME

    LME copper prices vs. US cancel warrants

    Source: SMC Comtrade, LME

    13 yuan premium, after being in discount for the most part of the

    month. Shanghai had a premium of 1,500 yuan to London at the

    start of the month.

    Copper prices have risen around $4800/tonne from near

    $3,200/tonne at the end of last year and premiums for physical

    material in Europe have also moved higher alongside future

    contracts. The premium for copper on Europe's physical marketagainst LME cash contracts is up at about $90/tonne from

    around $60/tonne and about $20/tonne at the start of the year

    when markets were in the throes of despair. More over, Copper

    buyers are now looking Further afield (is an LME warehouse in

    4

  • 8/14/2019 SMC Comtrade - Copper Gearing Up

    7/14

    comtrade

    New Orleans) for the metal which has seen cancelled warrants -

    - material tagged for delivery -- rise to 40825 tonnes from 500tonnes at the end of March.

    Spot copper TC/RCs around $50/tonne

    Spot copper treatment and refining charges have fallen to about

    $50/tonne in the European region down from a TC/RC level of

    $75/tonne reported in March. TC/RCs, the fees charged by

    smelters to refine copper concentrate into metal and are also a

    key part of global copper industry's revenues. Generally,

    TC/RCs are higher when more amount of concentrate available

    for smelting which also implies more of refine metal supply innear terms. Lower TC/RCs gets adjusted towards the demand

    side as they can result into physical tightness going ahead.

    European TC/RCs are comparative lower than Chinese

    smelters due to their higher domestic prices. Going ahead

    these charges will find support due to Chinese demand,

    production cuts announced by several producers and falling

    LME stocks.

    Scrap metal decline supports copper prices

    Second hand-copper gather by the so-called urban minershave been disappointed due to lowed availability of scrap

    copper which accounts for nearly a third of the 24 million-tonne

    world copper market. Copper scrap acts like a buffer: when

    prices reached $9,000/tonne in July 2008, scrap supply helped

    keep them from rising further and the collapse in scrap supplies

    helped support prices when they fell to around $3,000/tonne.

    Chinese buyers, which account for about 24 percent of world

    copper scrap consumption, remained active in the low-grade

    scrap market used in domestic manufacturing. With falling

    prices around 70-80 percent of the high-end scrap market is

    likely being disappeared since last year. As per ICSG, the

    United States is the world's main supplier of scrap copper.

    Weak margins and lower international prices along with a nose-

    dive in the US and European manufacturing activities have

    been restricting an important source of scrap copper for the

    world. This will further lead to a severe contraction in the global

    scrap metal market supporting higher copper prices.

    There have been two stories dominating the demand side of the

    copper market this year. The Chinese buying sphere, which is

    taking advantage of multi year low copper prices on hopes

    supported by a massive loosening of credit which in turn

    boosted consumption, and huge state investments such as

    Demand

    electricity; and surging ISM numbers, boosted the ongoing

    optimism of an early recovery from the earlier estimation of prolonged recession.

    LME copper stocks levels at major locations

    Source: SMC Comtrade, LME

    The Chinese government operates it own buffer stock

    operations via the State Reserve Bureau (SRB). As with

    commercial players, the Bureau's actions are counter-cyclical,buying when prices are weak and selling when they are strong.

    But it tends to hold onto what it buys for longer periods of time,

    causing even more headaches for statisticians. The media like

    to use the adjective "secretive" when talking about the SRB and

    by contrast with its smaller counterpart in South Korea.

    However, if its recent buying is a secret, it's the worst-kept secret

    in the market. What we don't know yet, though, is the Bureau's

    tonnage target or its timeframe, both critical to understanding

    the likely evolution of the market in the coming period. What we

    do know is that its price trigger to restock was somewhere

    around the $3,000 per tonne level. Similarly there's also a strong

    surge in the manufacturing numbers in the major consuming

    economies, which was also reflected in sharp recovery in

    copper prices. The metal, often seen as a barometer of

    underlying economic strength, rose nearly 20 percent in March

    alone and was on track to its best quarterly performance since

    the second quarter of 2006. The surge in prices for one of the

    most widely used materials in construction, automobiles and

    electronics reflects cautious optimism in financial markets that

    the economic situation has turned a corner, the majority of the

    metal's rally over the past few months was fueled by a change in

    sentiment and of what can probably happen in the future.

    5

  • 8/14/2019 SMC Comtrade - Copper Gearing Up

    8/14

    0

    50

    100

    150

    200

    250

    300

    Jan-08

    Feb-08

    Mar-08

    Apr-08

    May-08

    Jun-08

    Jul-08

    Aug-08

    Sep-08

    Oct-08

    Nov-08

    Dec-08

    Jan-09

    Feb-09

    Mar-09

    Apr-09

    China PMI Copper Imports Iron Ore Imports

    Traditional demand drivers are likely to take charge

    again

    However, as seen since the summer of 2006, China solely

    dominated world copper demand by its vicarious appetite.

    China has taken the lead from the traditional copper consuming

    economies of North America and Western Europe. But from

    going into 2010 2011, we are expecting these old drivers to

    once again take charge as they are injected by very cheap dose

    of massive government spending in order to stimulate them.

    The combine efforts of major central banks at the international

    level are expected to shown results after the second half of this

    year, which in turn will help in improving their growth numbers.

    US Housing and automobile sectors are likely to bottom

    out in coming quarters

    As far as US is concern, copper demand has been weak since

    the start of 2008. Unsurprisingly given the escalation of the

    housing and mortgage market fall-out, activity in copper market

    failed to revive since this period. Going ahead from here,

    housing sector still has some pain left which should be healed

    towards the end of this year. With record low long-term

    mortgage rates, and strong support from the Obama

    administration's $787 billion spending and tax cut package. The

    U.S. Congress approved the stimulus in February to kick-start

    the economy. We remain optimistic about this sector. Housing

    numbers have already witnessed a gentle and more flatter

    shape in their curve indicating much reduced pace of their

    decline. In another reports, sales of new single-family homes

    rose 4.7 percent in February, their fastest pace in 10 months.

    The new home sales data followed an unexpectedly strong 5.1

    percent jump in existing home sales.

    Further evidence of a potential bottom in the recession was

    seen in U.S. consumer confidence data that showed spending

    rise for a third straight month in April, while sentiment edged up

    in May with the market consensus of 42.3 as compared to 39.2

    in last month. The data is schedule to print on 26 of this month.

    These datas are lifting hopes that the housing industry slump

    could be moderating.

    Building construction accounts for more than 40 percent of all

    copper use, with the average U.S. family home containing 439

    pounds of copper. More over, US bellwether auto sector

    is also likely to gain from the ongoing government efforts to

    restructure them. According to the latest US vehicle survey,

    there are around 250 million vehicles on the road, and only 9.2

    million new vehicles are expected to be manufactured this year.Which means that car stockpiles can get over soon resulting in

    latent demand for new cars. Cars use copper for everything

    from the radiator to break lines.

    comtrade

    Surging Chinese demand

    In contrast to the US, 2009 will go down as a banner year in

    terms of Chinese copper demand. A backdrop of strong

    government initiatives - earlier for cooling its economy in 2007-

    2008 & now stimulating with massive spending in 2008-2009,

    has supported the robust end-use markets internally, as

    evidenced by a strong surge in the PMI figures which are now

    much above their 50 level mark signaling manufacturing activity

    is back on track.

    Further more, after consumer and strategic destocking last year

    there has been the need to rebuilt their warehouses. And the

    slump in prices at its multi year lows provided Chinese buyers

    with an irresistible opportunity.

    Imports of copper surged to record levels in past three months of

    6

    Source: SMC Comtrade, Bloomberg

    Incredible China

    Source: SMC Comtrade, Bloomberg

    Chinese appetite

  • 8/14/2019 SMC Comtrade - Copper Gearing Up

    9/14

    comtrade

    this year. This type of massive buying has also resulted in

    depletion of stock from the LME warehouses located in Asianand to a certain extent European warehouses. More over, it

    might seem that China is currently flooded with copper

    inventory in near term but our long-held forecasts for a strong

    third and fourth quarter look well founded. Chinese buying could

    once again become aggressive over the next 6 9 months; with

    some tightness in the mine copper (raw materials - due to mine

    shutdowns and low grade ores) the emphasis will be increasing

    imports of cathodes. A significant rally in copper prices is

    therefore a real possibility in the coming months.

    The long list of output curbs by mining and metal producers has

    continued to grow rapidly in the first quarter of 2009. Steps

    taken since the start of the year have come on top of a swathe of

    cuts announced in late 2008 in response to plummeting

    demand from the car and construction sectors. Copper

    producers in particular have felt less of a need to respond to

    falling prices as many are still profitable but still output has

    already been hit hard by technical problems and lower ore

    grades at some major operations. As per the recent estimated

    data of the annualized cutbacks of the metals accounted for

    550000 tonnes, which is lesser than 5 percent of the global

    output.

    Copper still carries its long-term supply specific problems,

    which are lower ore quality and labor issues. Labor issues are

    the maximum copper mining as compared to any other metal in

    this decade. It is no wonder why copper prices have remained

    above their production costs as compared to other metals and

    also made maximum gains in their values on diminutive signs of

    global recovery.

    Raw material markets have tightened

    Overall, smelter and refinery capacity, especially in China, is still

    operating at a faster pace than mine production which seems so

    frequently to be disrupted due to production cuts or work halts.

    Scrap availability has also tightened as prices fell, while

    government, most notable Chinese, last year started to clamp

    down on the misreporting of scrap grades and smuggling. The

    impact of copper supply chain will be most strongly in China, the

    world's scrap importer.

    The supply pipeline

    Rising copper prices and global improving sentiments can

    make louder cries of mine workers in coming months. More

    over, copper supply will lag much behind its demand, as it will

    Supply

    take time for copper mines to resume their normal operations.

    Apart from this issue, Copper market balance has shifted into a

    huge surplus in this year as per the expectations of the

    International Copper Study Group (ICSG). The Lisbon-based

    group expects world mine production to rise to 16 million tonnes

    in 2009, up 3.8 percent from 2008, and growing to 17.2 million

    tonnes in 2010. Output of refined copper in 2009 is expected to

    slow to 17.6 million tonnes, down about 700,000 tonnes or 3.7

    percent, from 2008 levels. A significant portion of the decline in

    output, about 200,000 tonnes, is attributed to reduced

    secondary production stemming from a global shortage of

    copper scrap. Copper market will have an expected surplus of

    above 345000 tonnes in 2009 and it would be growing to around

    400000 tonnes in 2010.

    Lower mine ore has been a major concerning factor in few of the

    top mines in South America. In the latest press release by

    majority owner BHP Billiton, it stated that Chile's Escondida

    copper mine - the world's largest, will fall by 30 percent in the

    2009 financial year versus the previous year. Mining of less rich

    ore and problems in the milling process are the major reasons

    behind the drop in output. Last year the mine produced 1 million

    tonnes of copper, or just under 5 percent of global output.

    Demand summary and outlook

    US copper demand has been hit hard since last two years

    due to downturn in US housing market. However, we still

    feel that the importance of US market in terms of global

    consumption can once again regain its status in the copper

    market.

    Chinese demand has been underpinned by strong buying

    from SRB. End use share in the total Chinese demandshould increase further more, which is also backed by

    massive government spending.

    We see no let-up in Chinese demand growth and we are

    expecting a strong fourth quarter in terms of buying activity

    and imports.

    Supply summary and outlook

    As of now Copper market is adequately supplied with

    stocks due to destocking and cut downs in manufacturingand production activities. We expect this excess surplus to

    remain for the remainder of the year and in first few

    quarters of next year as well.

    Copper market outlook

    7

  • 8/14/2019 SMC Comtrade - Copper Gearing Up

    10/14

    comtrade

    The scrap tightness will be in limelight in this year, especially in China and European trades.

    Longer term, there are numerous large mines around the world at various stages of planning, evaluation and development, which

    have been forced to delay their operations while many have experienced output cuts due to recent credit crisis. Doubts over when

    these projects will make it to production means that copper supply and demand could remain very finely balanced into the next

    decade.

    Going ahead from here, we envisage copper prices have definitely made their bottom at around $3500/tonne and now it is not long

    enough when copper once again resumes it's up trend. We remain dependent on China to lead copper demand, which now should also

    find support from the so far moribund metal demand from major consuming economies. Declining prices of US dollar and rising inflation in

    the days to come will provide a strong platform for the surge in prices from macro economic point of view. Our base case forecast is$6000/tonne in 2009 and $7300/tonne in 2010.

    Tejas Seth - Sr. Research Analyst

    [email protected]

    Our base case scenario for prices

    Analyst

    Disclaimer:This report is for personal information of the authorized recipient and doesn't construe to be any investment, legal or taxation advice to you. It is only for private circulation

    and use. The report is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon as such. No action is

    solicited on the basis of the contents of the report. The report should not be reproduced or redistributed to any other person(s) in any form without prior written permission of SMC.

    The contents of this material are general and are neither comprehensive nor inclusive. Neither SMC nor any of its affiliates, associates, representatives, directors or employees

    assume any responsibility for any loss or damage that may arise to any person due to any trading/action taken on the basis of this report. It does not constitute personal

    recommendations or take into account the particular investment objectives, financial situations or needs of an individual client or a corporate/s or any entity/s. All investments involve

    risk and past performance doesn't guarantee future results. The value of, and income from investments may vary because of the changes in the macro and micro factors given at a

    certain period of time. The person should use his/her own investigations and judgment while taking any positions or investment decisions.

    Please note that we and our affiliates, officers, directors, and employees, including persons involved in the preparation or issuance if this material;(a) from time to time, may have long

    or short positions in, and buy or sell the commodities thereof, mentioned here in or (b) be engaged in any other transaction involving such commodities and earn brokerage or other

    compensation (c) may have any other potential conflict of interest with respect to any recommendation and related information and opinions. All disputes shall be subject to the

    exclusive jurisdiction of courts at Delhi.

    8

    Analyst

  • 8/14/2019 SMC Comtrade - Copper Gearing Up

    11/14

    Notes

  • 8/14/2019 SMC Comtrade - Copper Gearing Up

    12/14

    Notes

  • 8/14/2019 SMC Comtrade - Copper Gearing Up

    13/14

  • 8/14/2019 SMC Comtrade - Copper Gearing Up

    14/14