Commodity Insights Bulletin - Copper Q2 - Q3, 2017 | KPMG | GLOBAL

Commodity Insights Bulletin - Copper Q2, 2017 - Q3, 2017

Commodity Insights Bulletin - Copper Q2 - Q3, 2017

On balance, 2017 has been a standout year for copper, with prices enjoying gains of nearly 25% during the year.

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Commodity Lead, Copper

KPMG Australia

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Overview

On balance, 2017 has been a standout year for copper, with prices enjoying gains of nearly 25% during the year. At times, investor sentiment pushed prices higher than what could be justified by fundamentals but prices moderated somewhat during Q4. Concerns over a slowdown in Chinese demand coupled with a strengthening USD eroded some of these gains.

Early indications are that the market will swing into a deficit (undersupply) position in early 2019 but there is the potentially for this to occur earlier, meaning that copper prices should continue their upward trend in 2018 but this time in a more sustained manner. Whilst all eyes will continue to be on China's infrastructure and real estate sectors for signs of sustained growth, the supply equation will be equally important.

2018 will see an unusually higher number of labor contracts come up for renewal which could further tighten the market. Over 30 Chilean mines will negotiate worker contracts with unions next year. This represents about three-quarters of the country's copper output, or about one-fifth of world production. Peruvian mines could also be affected, with workers at Cerro Verde and Southern Peru's Cuajone and Toquepala mines also due to negotiate labor contracts in 2018. Whilst fears of significant supply disruptions have not necessarily materialized in the past, operators will be looking to secure production by agreeing contracts up front.

Assuming Chinese demand continues at current rates and supply tightens, optimism over 2018 will be well founded. Prices should average above the US$3.0/lb mark in the second half of 2018.

Price outlook

Copper prices on the London Metal Exchange (LME) averaged US$2.7/lb in Q1 2017, a 25 percent y-o-y increase. This was primarily driven by supply disruptions at three of the world's largest mines -- Escondida in Chile and Cerro Verde in Peru due to labor issues and at Grasberg in Indonesia due to copper export restrictions.

In Q2 2017, copper prices fell to US$2.6/lb, a 3 percent q-o-q decline due to unfavorable growth data from China and higher inventory levels.

In Q3 2017, prices rebounded and averaged US$2.9/lb, a 12.1 percent q-o-q increase, driven by optimism over a recovery in estimated copper consumption from China. This was fuelled by the Producers Manufacturing Index (PMI) rating in August 2017 (51.7), beating Bloomberg's forecast of 51.3 and topping July's PMI of 51.3. PMI is an indicator of economic health for the manufacturing sector, thus impacting base metals demand. A PMI of more than 50 represents expansion in the manufacturing sector when compared with base period. The price increase was also supported by a weaker US dollar and industrial action in Chile and Peru -- two of the largest copper producers. Copper prices rose to a two-year high in mid-August 2017, over US$3/lb, as a result of investor anxiety over the potential ban on Chinese imports of scrap metal from the end of 2018, which may lead to higher imports of refined copper and concentrates.
The upward trend in prices slowed in Q4 2017, but recovered somewhat in early December, to reach US$3.2/lb on 21 December 2017.

During 2018 -2020, prices are expected to increase at a Compound Annual Growth Rate (CAGR) of 2.2 percent, exceeding US$3/lb by 2020, from an estimated average price of US$2.9/lb in 2018. Prices are expected to further increase during 2019 and reach up-to US$3.04/lb in 2020, when it is anticipated that consumption will significantly outpace mine supply.

Figure 1: China copper imports (Kt — thousand tons) and LME copper prices, April 2015–September 2017

Source (s): IMF Primary Commodity Prices, International Monetary Fund, accessed November 2017; China Imports and Exports of Copper and Aluminum updates: March–May 2017, Shanghai Metals Market, accessed November 2017; UPDATE 2-China Sept copper imports hit highest since March, aluminum exports fall, Reuters website, accessed November 2017; Copper: Monthly Average Settlement Price, July–September 2017, LME website, accessed November 2017.

China's Q3 2017 imports rose to 1,210 thousand tons (Kt), reflecting a 15.2 percent y-o-y increase from 1,050Kt in Q3 2016, driven by steady demand from China’s infrastructure sector and positive PMI ratings.

Supply and demand

Supply

  • Global mine production is estimated to decrease marginally by 0.1 percent to reach 20.12 million tons (Mt) in 2017, from 20.14Mt in 2016. This is attributed to supply issues at two major copper mines (Escondida and Grasberg) in the first half of 2017. In Q2 2017, global mine production increased marginally by 0.7 percent y-o-y to reach 5.2Mt, driven by increased supply from Africa and Kazakhstan, partly offset by production declines in Canada and Chile. In Q2 2017, heavy rainfall in South Australia had a negative impact on copper production, resulting in lower production at Oz Minerals' Prominent Hill operations and Olympic Dam. During Q3 2017, supply disruptions in Chile eased, as a 44-day long strike at the Escondida mine ended, leading to a recovery in output. In the same period, Freeport-MacMoRan entered into a new agreement with the Indonesian government over its mining permit extension for the Grasberg mine. This resolved the earlier ban on exports which had negatively impacted exports in Q1 2017.
  • In Q2 2017, Australia's copper export earnings increased 3.5 percent y-o-y to US$2.1 billion, driven by an increase in copper prices, despite a 2.9 percent decline in export volumes. Australian exports of refined copper, copper ores and concentrates to China declined 45 and 11 percent y-o-y in Q2 2017, respectively. Additionally, mine production declined 7.3 percent y-o-y in Q2 2017, due to interruptions at several mines, including seismic activity at Newcrest's CadiaValley, where production decreased 52 percent y-o-y in Q2 2017. Operations at CadiaValley have returned to normal, amid a second earthquake in the year in November 2017. Australian mine production is forecast to increase 5.7 percent annually from 917Kt in 2016 -2017 to 1,025Kt in 2018 -2019, driven by improved output at BHP Billiton's Olympic Dam -- Australia's largest copper mine. BHP Billiton announced investments of US$350 million on improvements at the Olympic Dam smelter in July 2017. Following completion of these improvements, production is expected to increase to 215Kt in 2018 -2019.
  • In 2018, it is expected that global mine production will increase 5.5 percent y-o-y, to reach 21.3Mt. This would lead to a market surplus of 478Kt and copper inventory to rise from 2.6 weeks in 2017 to 2.9 weeks in 2018. This is likely to be driven by additional 1Mt global capacity to come online in 2018. The Cobre Panama mine, Panama -- operated by First Quantum Minerals -- is expected to make the largest contribution, with an estimated annual production capacity of 330Kt. The Qulong copper mine, China -- operated by Tibet Julong Mining -- is expected to be the second-largest new project in 2018, with an annual production capacity of 120Kt. The two largest expansion projects -- Codelco's Radomiro mine in Chile and Southern Copper's Toquepalain mine in Peru -- are collectively expected to contribute an additional 100Kt each in 2018.
  • Long-term global mine production is projected to increase to 21.99Mt in 2020, growing at a CAGR of 3 percent during 2017 -2020, driven by new mines and expansions across the major producing nations, such as Chile, China, Peru, Democratic Republic of Congo, Zambia and Russia.
  • In terms of refined copper, production increased 2.8 percent y-o-y to 5.9Mt in Q2 2017, driven by increased production by China (by additional 83Kt) and Europe (by additional 2Kt), as a result of increase in secondary production from scrap copper.
  • Global long-term refined copper production is forecast to rise from 23Mt in 2017 to 24.6Mt by 2020. Higher refined production will be driven by new refineries and expansion projects in China, expected to come from the commissioning of new capacity projects by Chalco and Qiqihar City, Heilongjiang Province, in 2019.

Figure 2: Global production of mined copper, 2014–2020F

Note: F stands for forecast data; DRC stands for Democratic Republic of Congo; RoW stands for Rest of the World.
Source: Copper Forecasts, Credit Suisse, 24 October 2017; via Thomson One, accessed November 2017.

Figure 3: Global production of refined copper, 2014–2020F

Note: F stands for forecast data; DRC stands for Democratic Republic of Congo; RoW stands for Rest of the World.
Source: Copper Forecasts, Credit Suisse, 24 October 2017; via Thomson One, accessed November 2017.

Demand

  • Global consumption is tracking to grow 2.7 percent y-o-y in 2017 reaching 23.2Mt, primarily due to the Chinese government’s investments in the construction and infrastructure sector, which includes the country’s power transmission network.
  • In Q2 2017, global consumption decreased marginally by 1 percent y-o-y to 6.1Mt, due to lower usage in China and Europe. However, increases in China’s Q2 2017 Gross Domestic Product (GDP), growth in industrial production and rise in the global PMI in August supported the positive outlook for 2017 copper consumption.
  • China, which represents approximately 50 percent of global demand, is expected to witness growth in consumption between 2018 and 2019, driven by the government’s investment in the nation’s power grid and growth in the construction and manufacturing sectors. China’s power grid expenditure increased 9.1 percent y-o-y in Q3 2017, after a slow start in H1 2017. In addition, in Q3 2017, the commercial ‘floor-space started’ indicator grew 3.2 percent y-o-y, signaling higher copper consumption over the next 12 months. This indicator is a leading indicator for China’s construction sector.
  • The US manufacturing sector started H1 2017 on a weaker note, with flat electrical equipment production and vehicle production falling approximately 3.2 percent y-o-y. This contributed to a 1.7 percent y-o-y decline in US copper consumption in H1 2017. However, New Housing Permits (NHP) increased 8.3 percent y-o-y in the first five months of 2017, pointing toward positive copper demand outlook in 2017.
  • An acceleration in demand of electric vehicles (EVs) and renewable energy globally is expected to increase copper consumption over 2018–2020. An average electric vehicle contains 85 kilograms of copper, compared to 25 kilograms for regular vehicles. Global sales of EVs increased 40 percent y-o-y in the first eight months of 2017 to nearly 600,000 sales. EVs are expected to lift copper demand by an incremental 200Kt by 2020 and approximately 600–700Kt by 2025. Additionally, copper is extensively used in renewable energy technology and infrastructure — spending on these is expected to increase between 2018 and 2020. This is expected lead to additional demand from the renewable sector in countries such as India and South Korea — the leading copper consumers in the renewable sector, globally.
  • Long-term global copper consumption is estimated to grow at a CAGR of 1.8 percent between 2018 and 2020 to reach 24.5Mt by 2020, driven by growth in global industrial production and higher investment in energy infrastructure. Emerging economies are expected to be major growth drivers of copper consumption over the forecast period (2018–2020).

Figure 4: Global consumption of refined copper, 2014–2020F

Note: F stands for forecast data; DRC stands for Democratic Republic of Congo; RoW stands for Rest of the World.
Source: Copper Forecasts, Credit Suisse, 24 October 2017; via Thomson One, accessed November 2017.

Figure 5: Global market balance and prices of refined copper, 2016–2020F

Source: Capital IQ, consensus prices, accessed November 2017; Copper Forecasts, Credit Suisse, 24 October 2017; via Thomson One, accessed November 2017.

*Market balance represents the difference between the supply of 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.

Key developments

Ownership changes

The total value of 10 major deals announced in Q2 2017 was US$0.08 billion, compared with 12 deals in Q3 2017, valued at US$0.15 billion. In Q4 2017 (YTD*), a total of 14 deals were announced, with a total value of US$2.7 billion.

In Q4 2017, First Quantum Minerals Ltd was granted an option to acquire a 50 percent stake in Pebble LP — an Anchorage-based copper and gold mining company, from Northern Dynasty Minerals Ltd, for US$1.5 billion. This deal was announced on 18 December 2017.

Figure 6: Value of announced deals in the global copper industry*

Source: Mergermarket and Thomson database accessed December 2017
*Only deals with disclosed value for Q2 2017, Q3 2017 and Q4 2017 ( till 21 December 2017) have been considered

References

Price outlook: Resources and Energy Quarterly, Bureau of Resources & Energy Economics (BREE), Australian Government, June quarter, September quarter 2017, accessed November 2017; METALS-London copper hits 2-year high on outlook that China may ban scrap imports, 26 July 2017, Reuters website, as accessed in November 2017; Aus gold, copper, nickel & zinc, 2 November 2017; Australia & NZ, 25 October 2017; Copper Forecasts, 24 October 2017 -- Credit Suisse, sourced via Thomson One, accessed in November 2017; Mighty Month for Metals Sees Best Gains in Years on Rates, China, 1 September 2017, Bloomberg website, accessed in November 2017; Copper streaming Chart, 21 December 2017, Investing website, as accessed on 21 December 2017.

Figure 1: Source (s): IMF Primary Commodity Prices, International Monetary Fund, http://www.imf.org/external/np/res/commod/index.aspx, accessed November 2017; China Imports and Exports of Copper and Aluminum updates: March -May 2017, Shanghai Metals Market, accessed November 2017; UPDATE 2-China Sept copper imports hit highest since March, aluminum exports fall, https://af.reuters.com/article/commoditiesNews/idAFL4N1MO1N7, Reuters website, accessed November 2017; Copper: Monthly Average Settlement Price, July -September 2017, https://www.lme.com/Market-Data/Reports-and-data/Monthly-averages, LME website, accessed November 2017.

Supply: Resources and Energy Quarterly, Bureau of Resources & Energy Economics (BREE), Australian Government, June quarter, September quarter 2017, accessed November 2017;Aus gold, copper, nickel & zinc, 2 November 2017; Australia & NZ, 25 October 2017; Copper Forecasts, 24 October 2017 -- Credit Suisse, sourced via Thomson One, accessed in November 2017; Copper price update: Supply dynamics, 9 October 2017, Investing News website, accessed in November 2017; Copper Mail No. 149, 30 June 2017, Aurubis website, as accessed on 21 December 2017.

Demand: Resources and Energy Quarterly, Bureau of Resources & Energy Economics (BREE), Australian Government, June quarter, September quarter 2017, accessed November 2017;Aus gold, copper, nickel & zinc, 2 November 2017; Australia & NZ, 25 October 2017; Copper Forecasts, 24 October 2017 -- Credit Suisse, sourced via Thomson One, accessed in November 2017; Secondary production shores up refined copper market, 25 September 2017, Recycling International website, as accessed on 21 December 2017.

Ownership changes: Mergermarket and Thomson database, accessed December 2017.

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

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