The Aurubis Copper Mail informs you monthly about current trends on the copper market.

Transcription

1 Copper Mail No. 127 August 31, 2015 The Aurubis Copper Mail informs you monthly about current trends on the copper market. In focus The situation in China isn t settling down. Once again, the country has become the focus of developments on the international stock and raw material markets. On July 25, another uncontrolled price decline on the Chinese stock market created shockwaves that affected markets around the world. Although the country s government and central bank continue to work against an economic slowdown with all available means, investors don t seem to honor these efforts. Like other raw materials, copper was also subject to significant price pressure. The downward trend intensified and resulted in a six-year low of under US$ 5,000/t. Many market actors are calling for more rationality in the assessment of the real Chinese economy, however. 1

2 Economic situation One example is the chairman of the German Central Bank, Joachim Nagel, who warned against exaggerated reactions to the economic concerns in China on the financial markets and points out that the country s growth rates are currently normalizing. He stated that 6 % was still a strong economic growth rate. The chairman of BHP Billiton believes that the situation is bottoming out in China and expects a better second half of The head of Apple reports strong continued growth in Chinese business for July and August. Furthermore, economic development in the US and parts of the Eurozone, both significant copper sales markets, indicate an opposite trend. The US economy grew more strongly than anticipated in the second quarter, reaching an annualized plus of 3.7 % in the second GDP estimate (first estimate: 2.3 %). This primarily shows that US companies have become less cautious in their investments. In the Eurozone, the UK and Germany in particular exhibit a positive trend. The business climate in Germany as assessed by the Ifo Institute increased by 0.3 % to points in August. Copper essentials The current situation playing out on the Chinese copper market doesn t have much to do with the general picture of China s economic circumstances. The surprise of the yuan devaluation appears to have been absorbed for the time being. The expectation that this measure will lead to higher costs for importing refined copper has led to higher domestic prices and therefore to an expansion of the arbitrage between the LME and the SHFE. The result is a higher number of active buyers on the market. Volumes from Chinese bonded warehouses are preferred in particular, as they have the advantage of proximity and are readily available. CRU estimates the corresponding inventory level in Shanghai at 470,000 t at the end of August, after 660,000 t in early July. Reuters reports a level of around 500,000 t at the moment. At the same time, the news agency has mentioned premium indications of US$ 100 2

3 to 130/t above the LME spot prices for cathode deliveries from bonded warehouses. This is roughly twice as high as the conditions in early July. These inventory fluctuations are also related to the upcoming fall season, which includes a concentration of holidays in China (Moon Festival on September 27, National Day on October 1) leading to a nationwide vacation period, during which many of the country s industrial activities will shut down. In addition, LME Week will start on October 12, during which the copper world will meet in London to start the negotiation season for 2016 copper concentrate and product contracts. The cathode premiums for 2016 will also be released at this time, which will likely influence the current view of the market and thus the current business as well. Furthermore, there is another development that could affect the copper market in the coming weeks and months but that hasn t received much attention yet. The American weather authority NOAA warns of an especially dangerous El Niño this year, a weather phenomenon in which the current conditions in the Pacific change dramatically and cause extreme weather conditions. Initial impacts, e.g. an unusual accumulation of tropical storms and hurricanes, can already be observed. The forecast, which assumes that the current phenomena will become stronger in the coming months, is considered to be well-founded. Strong rainfall, flooding and earthquakes are predicted for South America. If this occurs, the copper industry in Chile and Peru will be affected by impacts on production. According to the International Copper Study Group, statistically speaking, the global market for refined copper is largely balanced between production and utilization after the first five months of 2015, taking inventory changes in China s bonded warehouses into account. After the first quarter, during which copper demand was weak due to seasonal effects, there was a demand surplus in April and May, which was nevertheless marginal. Due to the latest declines in the bonded warehouse inventories in China, however, this demand surplus could intensify in the following months. 3

4 Price trend Under the pressure of the distortions on the Chinese stock market, the copper price temporarily fell to below US$ 5,000/t, reaching a six-year low. The lowest LME price of the month was US$ 4,888/t (settlement) on August 24, Afterwards, there was a price correction to slightly above US$ 5,000/t. Looking at the LME price structure, there was a backwardation again recently that expanded from an initial level of US$ 20/t to almost US$ 40/t for three-month contracts. In this constellation, the spot price exceeds the forward price. This could also be a sign of a shortage of commodities available at short notice. 4

5 Copper raw materials There was another export stop for copper concentrates from the Grasberg Mine in Indonesia. Freeport-McMoran s export volumes have been affected since July 25. On an annual basis, they are at about 60 % of an estimated 2 million t of copper concentrates/year, so 1.2 million t of copper concentrates/year. Mining continues, however. The reason for the export stop is the expiration of an exemption from rules regarding payment transactions. Negotiations with customers and the Indonesian government are in high gear according to reports from the company. The second large mine operator, Newmont Mining, is reportedly implementing the new payment regulations without objection. China s imports of copper concentrates decreased in July by 2.3 % compared to the previous month and were at about 966,000 t. Imports from Chile and Australia were lower in particular. There were few changes on the European copper scrap market in August. Business activities that had already been influenced by the summer holiday period in Italy, France and Germany came almost completely to a halt due to the further price decline. Traders assumed a cautious position and looked for orientation. There was an explosion in the Port of Tianjin in 5

6 China, one of the key ports of entry for copper scrap. Since normal operations aren t possible for the time being, deliveries have to be rerouted, which leads to complications. Production According to the national statistics authority, Chinese production of refined copper in July was 663,520 t, or 4.5 % below the previous month. Nevertheless, this was a 9.43 % increase compared to the previous year. In the meantime, though, reports are increasing that Chinese smelters are dialing down production and sales due to the low copper price. For example, according to some media outlets, Jiangxi Copper s Guixi Smelter is supposed to reduce its production by 10 % in the next four months, which translates to a decrease of roughly 10,000 t each month. Another burdensome factor is the lower availability of concentrates from domestic mines and the diminished scrap supply. Production losses are also expected in Zambia after reports that the copper industry s energy supply there is supposed to be reduced in order to relieve the national energy grid. Inventories The copper inventories in the LME warehouses rose by about 24,000 t to 370,000 t in August. A total of 56,225 t of this volume is registered for delivery. More and more deliveries are being planned at the Asian locations of Johor, Port Klang and Singapore. There were only minimal changes in the European LME warehouses in August (< 1,000 t). The inventory level there is 96,175 t. There currently aren t any strong inventory fluctuations at the SHFE yet, either. The copper volumes stored there have been slightly over 120,000 t since mid- August. 6

7 Product markets The product markets are also under the influence of the calm summer period. However, reports from the German electrical industry indicate that the sector s economic situation is gathering speed, supported first and foremost by the weak euro. Exports increased by 13.8 % in June 2015 compared to June Nevertheless, the annual forecast of a real production increase of 1.5 % issued by the industry association ZVEI remains unchanged. The association also reported that the global electrical market could grow by an average of 5 % this year and next year and that China is supposed to move upward with 9 % in 2015 and These are positive prospects for copper product demand. However, a great deal depends on the actual future developments in China. 7