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8/14/2019 SMC Comtrade - Copper Gearing Up
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CopperopperGearing up
comtrade
8/14/2019 SMC Comtrade - Copper Gearing Up
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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
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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
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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
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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
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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
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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.
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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
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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
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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
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
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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
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Analyst
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Notes
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Notes
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