COMMODITY Insights Bulletin - Copper Q4, 2015 - Q1, 2016

COMMODITY Bulletin - Copper Q4, 2015 - Q1, 2016

After commencing the year at a 6-year low, it appears that copper prices have hit a floor. A weaker US dollar, supply disruptions and opportunistic restocking by China have all contributed to improved investor sentiment.

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However, this is not to say that prices will recover completely. Far from it. It is likely that the rebound experienced in the first quarter of 2016, where copper prices increased by approximately 14% from a low of US$1.95/lb in January 2016, will be short-lived. Sustained price growth will be difficult to maintain in an environment of oversupply and growth uncertainty.

Current rebound likely to be short lived

Sustained price growth will be difficult to maintain in an environment of oversupply and growth uncertainty. While China´s official manufacturing Purchasing Managers´ Index (PMI) for March came in at 50.2 (indicating expansion), it is too early to conclude that manufacturing activity has fully recovered. After all, it is the first time it has been above 50 in eight months.  It is also unclear how much inventory has been stockpiled in Chinese warehouses. Inventory levels in the Shanghai Futures Exchange reached record highs in March. This seems to suggest that Chinese copper imports are rising but aren’t necessarily backed by user demand. From a supply perspective, world mine production should continue to grow over the short term. Peru is leading the charge with a number of new projects either being completed or increasing production at existing mines. While the market should tighten in 2017, it is not expected to return to a deficit until 2019. This means that prices will remain at current levels for the shot to medium term. The volatility should subside by the second half of 2019, when prices should begin to show a sustained recovery.

Price outlook

In Q1 2016 the London Metal Exchange (LME) copper price was estimated1 to average around US$2.06/lb, 22 percent lower than Q1 2015. Average copper prices are forecast to decline by 10.8 percent to US$2.23/lb in 2016 from an average price of US$2.50/lb in 2015. Prices have fallen as a result of a decline in consumption and an increase in production, which contributed to a build-up of stocks on both the LME and the Shanghai Futures Exchange. Demand growth in China, which accounts for around half of global consumption, slowed to its lowest level since the Global Financial Crisis. Europe’s copper consumption also declined significantly. Production was supported by a combination of new project completions and increased output at existing mines, mainly in South America and Asia.

 

Over 2015–2019, prices are expected to increase at a CAGR of just 1 percent, to reach US$2.70/lb in 2019, from US$2.57/lb in 2015. Consumption growth is forecast to remain subdued as global and emerging economy growth recovers from a six-year low. Production is forecast to continue expanding steadily as a number of large projects currently in commissioning will reach full production. These projects were approved and commenced construction during the period of high prices in 2011–12.

 

1 Resources and Energy Quarterly”, Bureau of Resources & Energy Economics (BREE), Australian Government, March quarter 2016, accessed April 2016

Sources:   Import & Export commodities by industry, China Custom Statistics, HKTDC Research, accessed April 2016; IMF Primary Commodity Prices, International Monetary Fund, accessed  April 2016; China Imports and Exports of Copper and Aluminum in March 2016, Shanghai Metals Market; accessed  April 2016; KPMG Analysis

Source: Capital IQ, consensus prices, accessed April 2016; BMO Capital Markets, the Copper Wire - Weekly Copper Market Update, 4 April 2016; Resources and Energy Quarterly”, Bureau of Resources & Energy Economics (BREE), Australian Government, March quarter 2016, accessed April 2016; KPMG Analysis

*Market balance represents the difference between the supply and demand for refined copper. A positive market balance indicates that the supply is more than the demand, whereas a negative market balance indicates demand exceeding supply. F stands for forecast data

Supply and demand

Supply2

 

  • Mined copper production increased by about 4 percent, to reach 15,200 thousand tons (Kt) in 2015, from 14,600 Kt in 2014. The result was underpinned by a combination of new projects being completed and increased output at existing mines, mainly in South America and Asia. In South America, the increase in output was particularly steep in Peru with production ramping up or commencing at a number of large new projects. As a result, Peru overtook China to become the world’s second largest producer. In Asia, output also increased rapidly in Indonesia as a result of strong production gains at several large established mines.
  • In 2016 copper mine production is forecast to increase by a further 8.3 percent to 16,500 Kt, supported by the commissioning of MMG’s Las Bambas mine in Peru. Further capacity additions are expected from the Bozshakol mine in Kazakhstan and the Sierra Gorda mine in Chile.
  • Notwithstanding the expected growth in production, towards the end of the outlook period 2015–19, production growth is expected to become sluggish, owing to declining ore grades at older mines. This should intensify by the end of 2019. The expected slowdown in growth might become even more rapid, if further mine suspensions are announced.
  • World copper refined production increased by just 0.7 percent in 2015 to 22,300 Kt. This represented the weakest annual growth since 2009. The production is forecast to increase by 2 percent to 23,200 Kt in 2016, driven by increased refined copper production from China and India, but at lower growth rates. Ten smelters in China have announced plans to cut production in 2016 in response to lower prices. Over the medium term, growth in refined production is expected to recover, driven by increasing global copper consumption and projected higher prices. Refined production is projected to grow at an average annual rate of 2 percent until 2021 to 26,000 Kt.

 

2 Resources and Energy Quarterly”, Bureau of Resources & Energy Economics (BREE), Australian Government, March quarter 2016, accessed April 2016

Source: RBC Capital Markets, Metal Prospects – Copper Market Outlook – First Quarter 2016; via Thomson Research/ Investext, accessed March 2016; F stands for forecast data

Source: RBC Capital Markets, Metal Prospects – Copper Market Outlook – First Quarter 2016; via Thomson Research/ Investext, accessed March 2016

Demand3

 

  • World copper consumption decreased by around 2 percent to 22,400 Kt in 2015 — the first contraction in global copper demand since 2001. Slowing economic activity in China contributed to an estimated 3 percent contraction in China’s copper consumption. Weaker economic activity, reduced purchases by China’s State Reserve Bureau, the declining use of copper in financing deals, and slowing industrial activity were among the factors responsible for the decline in demand. Consumption in more developed markets across Europe was also lower, consistent with more subdued economic conditions.
  • Growth in world refined copper consumption is expected to increase over the medium term. Strengthening economic growth in emerging economies is expected to drive much of the increase in copper consumption. While copper demand tends to plateau in the latter stages of economic development, it typically increases rapidly as countries industrialize, driven by infrastructure investment, construction activity and expanded manufacturing. Overall growth among emerging economies is assumed to increase from 4.2 per cent in 2015 to 5.3 per cent by 2021.
  • Although, India accounts for about 2 percent of global refined consumption, it is expected to make an important contribution to demand growth over the medium term – driven by robust economic growth and investments in the power infrastructure. The 12th five-year plan in India (currently undergoing a mid-term appraisal) aims to increase power generation capacity by about 45 percent, during 2012–17. Further in China, investment in the electricity infrastructure is expected to provide some support to growth over the medium term, despite the projected slowdown in China’s copper consumption. The Chinese Government plans to spend about US$315 billion to improve its power grid infrastructure, over 2015–20.

 

3 Resources and Energy Quarterly”, Bureau of Resources & Energy Economics (BREE), Australian Government, March quarter 2016, accessed April 2016

Source: RBC Capital Markets, Metal Prospects – Copper Market Outlook – First Quarter 2016; via Thomson Research/ Investext, accessed April 2016

Key developments

Ownership changes4

 

The total value of ten major deals announced in Q1 2016 was US$3.5 billion, compared to eight deals in Q4 2015 valued at US$1.8 billion.

 

The largest deal was announced on 14 January 2016, wherein an investor group comprised of Aneka Tambang and Indonesia Asahan Aluminium agreed to acquire a 10.64 percent stake in Freeport Indonesia, a Jakarta-based copper and nickel ore mine operator, a unit of Freeport-McMoRan, for US$1.7 billion.

 

4 Mergermarket and Thomson database, accessed April 2016

Source: Mergermarket and Thomson database accessed April 2016

Deals with transaction value > US$2 million considered for Q1 2016 deals

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