Commodity Insights Bulletin - Copper Q2, 2016 - Q3, 2016

Commodity Bulletin - Copper Q2, 2016 - Q3, 2016

Copper prices surged in the aftermath of the US election.

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Overview

In 24 hours the price rose more than 6% and within three days had risen more than 17% to US$2.67/lb. This was impressive considering prices averaged US$2.14/lb in Q3 and reached levels not seen since June 2015.

Whilst we were seeing signs of improvement in Q3, these gains were relatively modest. Markets remained relatively well stocked and signs out of China indicated that imports remained subdued and still somewhat reliant on government stimulus measures.

However, this all changed after Trump´s election win. The US is the second largest individual consumer of copper behind China and thus whilst the US alone is unlikely to significantly alter global demand, expectations are that there will be more consumption from the western world.

During his campaign, president elect Trump pledged to stimulate the economy, create jobs and bring new life to declining industries. He promised to spend massively on infrastructure, transportation and telecommunications. Copper is used intensively in all of these industries.

This is good news for miners who have gone through difficult times and have had to carefully manage their cash flows. Unfortunately, in my opinion, the price increase will be short lived. The market should level out in the short term and whilst there will be some tightening by 2018, the expectation continues to be that the market won’t return to a deficit position until 2019.

Price outlook

The long-term downward trend of the London Metal Exchange (LME) copper prices started to flatten out during 2016. In Q2 2016, the LME prices averaged US$2.11/lb, about 6 percent lower than the previous quarter (Q1 2016); while prices averaged US$2.14/lb in Q3 2016 — about 2 percent higher from Q2 2016. However, y-o-y prices declined by 20 percent in Q2 2016 and about 9 percent in Q3 2016.

Copper prices have mostly fluctuated between US$2.0 and US$2.1/lb in 2016, remaining close to seven year lows. The fall in copper prices has been a result of sluggish consumption growth and increased production activity. In Europe, consumption remains 25 per cent lower than 2006 levels, owing to lower industrial production. Meanwhile, production declines in Chile — the world’s largest producer — have been entirely offset by increasing supply from Peru and other regions such as Asia.

Over 2016–2019, prices are expected to increase at a Compound Annual Growth Rate (CAGR) of 6 percent, to reach US$2.67/lb in 2019 from an average price of US$2.21/lb in 2016, driven by stronger economic growth in emerging countries and overall recovery in consumption levels.

China copper imports and LME copper prices, April 2014 – September 2016

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

China's Q2 2016 and Q3 2016 imports also saw a steeper fall than forecast, which indicated slow demand and unattractive arbitrage over the period. However, the decline was lower than the same period last year, indicating that China’s domestic demand was picking up.

Market balance and prices of refined copper, 2014 – 2019F

Source: Capital IQ, consensus prices, accessed October 2016; Gold and Copper Sector: Commodities and FX quarterly review, Credit Suisse, 14 October 2016; Resources and Energy Quarterly”, Bureau of Resources & Energy Economics (BREE), Australian Government, September quarter 2016, accessed October 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

Supply

  • Global mine production is expected to increase about 4.5 percent in 2016, to reach 20.1 million tons (Mt), from 19.2Mt in 2015. By 2017, production is expected to increase by about 3.0 percent to reach 20.6Mt. Over much of the past decade, copper producers received historically high prices, which encouraged investment and further increase in supply over the short term.
  • Peru increased mine production by 51 percent y-o-y over H1 2016, owing to mine expansions. MMG’s Las Bambas mine produced over 119 thousand tons (kt) of copper concentrate during H1 2016. Likewise, the recently expanded Cerro Verde copper mine in Peru, operated by Freeport-McMoRan, is expected to produce over 272kt of copper annually. Production increased substantially in Kazakhstan, rising 107 percent y-o-y to over 449kt in H1 2016. KAZ Minerals continues to develop two large open-pit mines in Kazakhstan, whilst Bozshakol and Aktogay are expected to produce 90–100kt of copper concentrate annually, respectively.
  • We note that these increases in production were somewhat offset by declines experienced in Chile, which accounts for about one-third of global copper output. Production from Chile has continued to decline since H1 2016, decreasing over 5 percent y-o-y. This year the mining sector has been heavily impacted by adverse climatic events in Chile's copper-rich Atacama as well as labor unrests and declining ore grades. BHP Billiton’s Escondida copper mine in Chile declined 20 percent y-o-y, producing 268Kt of copper in Q2 2016, due to lower ore grades.
  • Overall, global mine production is forecast to increase, as new projects developed over the past few years approach full capacity. Over 2016-2020, more mines are expected to commence production, whilst others are set to expand, including new mines by KAZ minerals and expansion of MMG’s Las Bamba, Chinalco’s Toromocho mine, Freeport’s Cerro Verde project and Southern Copper’s Tia Maria project. Accordingly, mine production is expected to grow at a CAGR 3.3 percent to reach about 22Mt by 2019.
  • Global refined production is expected to grow by 3 percent in 2016 to reach about 47Mt. In China, refined production increased 7 percent y-o-y during H1 2016, as the higher imports of concentrate have offset the decline in Chinese mine supply. Refined copper production increased in the US, Chile and Brazil during H1 2016. Brazil increased refined copper output by 70 percent y-o-y, while the US increased production by 18 percent y-o-y over the same period. Global refined production is forecast to continue to grow at a CAGR of 3 percent until 2019, driven by growing consumption.

Global production of mined copper, 2014 – 2019F

Source: Gold and Copper Sector: Commodities and FX quarterly review, Credit Suisse, 14 October 2016; via Thomson Research/ Investext, accessed October 2016; F stands for forecast data.

Global production of refined copper, 2014 – 2019F

Source: Gold and Copper Sector: Commodities and FX quarterly review, Credit Suisse, 14 October 2016; via Thomson Research/ Investext, accessed October 2016; F stands for forecast data.

Demand

  • Global refined consumption increased only 1.2 percent y-o-y to reach about 22Mt in 2015. In 2016, consumption is expected to grow by 3 percent y-o-y reaching 22.4Mt, primarily driven by China’s construction activity. Construction activity in China continued to increase during H1 2016, growing by 5.6 percent, bringing 32 billion square meters of floor space under construction. The construction sector in China accounts for over 60 percent of its consumption and was boosted by government stimulus earlier in 2016, which is expected to moderate during H2 2016.
  • In other Asian countries, copper consumption trends were mixed, witnessing an increase in Thailand and Taiwan more than offsetting a decline in Japan — the world’s fourth-largest consumer. Copper consumption dropped in Japan, largely due to continued economic downturn in its manufacturing sector. The number of machinery orders — which is an important indicator of Japan’s manufacturing sector performance — declined by about 8 percent y-o-y during H1 2016.
  • During the same period, copper consumption in the US declined by about 4 percent, due to sluggish economic growth, slowing activity in the construction sector and decline in the production of power equipment, which dropped about 16 percent over the same period (H1 2016).
  • Europe’s refined copper consumption increased 6 percent y-o-y during H1 2016, driven by the strong demand in Germany and Russia, which more than offset the declines in Belgium and Spain. Copper consumption increased by about 9 percent in Germany during H1 2016, supported by the continued growth in the construction sector.
  • Increased investment in infrastructure, construction and industrial capacity in emerging economies such as China and India, is expected to drive much of the growth in copper consumption over the next two years. Refined copper consumption is forecast to grow at a CAGR of 2.4 percent over 2015–2019, to about 24Mt by 2019.
  • With an improved economic outlook in China and hopes of increased US infrastructure spending after Trump's election win, it is expected that copper will be out of the years-long bear market. China plans to increase power investment by 83 percent in its 13th five-year plan period ending in 2020 — this will drive consumption growth as power sector consumes about half of the total country’s copper consumption. It is expected that China’s economic growth target of 6.5 percent for 2015–2020 would support consumption growth of about 2 percent.
  • According to the International Energy Agency, India's power production is expected to rise by about 5 percent annually to reach 3,300 TWh in 2040. India is required to invest a cumulative US$2.8 trillion by 2040 (an average of US$110 billion per year) into energy infrastructure to meet the target — in order to build the new infrastructure, India's annual copper demand is expected to more than double going forward.

Global consumption of refined copper, 2014 – 2019F

Source: Gold and Copper Sector: Commodities and FX quarterly review, Credit Suisse, 14 October 2016; via Thomson Research/ Investext, accessed October 2016; F stands for forecast data.

Key developments

Ownership changes

The total value of seven major deals announced in Q2 2016 was US$2.9 billion as compared to the 12 deals in Q3 2016 valued at US$0.6 billion.

This was due to the high-value deal, announced on 9 May 2016, wherein China Molybdenum Co. Ltd. agreed to acquire the entire share capital of Freeport-McMoRan DRC Holdings Ltd, a copper mining company, for US$2.8 billion. China Molybdenum also agreed to acquire the Cobalt and Kisanfu exploration project from Freeport.

Value of announced deals in the global copper industry

Source: Mergermarket and Thomson database accessed October 2016.

References

Price outlook: Resources and Energy Quarterly”, Bureau of Resources & Energy Economics (BREE), Australian Government, September quarter 2016, accessed October 2016.

Supply: Resources and Energy Quarterly”, Bureau of Resources & Energy Economics (BREE), Australian Government, September quarter 2016; Gold and Copper Sector: Commodities and FX quarterly review, Credit Suisse, 14 October 2016; Chile Q3 GDP growth slows as key mine sector slips, Reuters, 18 November 2016; Metal Prospects, Copper Market Outlook - Second Quarter 2016, RBC Capital Markets, 9 June 2016, via Thomson One; accessed October 2016.

Demand: Resources and Energy Quarterly”, Bureau of Resources & Energy Economics (BREE), Australian Government, September quarter 2016; Gold and Copper Sector: Commodities and FX quarterly review, Credit Suisse, 14 October 2016; Metal Prospects, Copper Market Outlook - Second Quarter 2016, RBC Capital Markets, 9 June 2016, via Thomson One; World Energy Outlook 2015, Factsheet India, IEA, (PDF 104 KB) accessed October 2016.

Ownership changes: Mergermarket and Thomson database, accessed October 2016.

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