Copper market headed for surplus, GFMS says

Up until the recent sell-off, there had been a prolonged run for copper prices. And the latest survey from Thomson Reuters GFMS says the recent drop in copper prices may not be a blip, but a sign of more weakness to come.  

Thomson Reuters GFMS’ Copper Survey 2014 predicts the copper market will move into surplus this year as mine supply ramps up, and that will likely have negative consequences for prices. 

The survey forecasts that the average price for the year will drop below US$7,000 per tonne (US$3.17 per lb.). If it does, it will mark the first time since 2009 that it has broken below that threshold. 

GFMS says prices could test the US$6,000-per-tonne mark (US$2.72 per lb.) over the second half of the year. 

The project surplus for 2014 contrasts with last year, when the copper market remained in balance despite global mine production rising by 8% — its fastest pace in over a decade. But balancing the new supply was strong demand growth, a tight scrap market and delays in processing concentrate into refined metal.  

Stockpiled refined metal in China used as collateral for loans  also kept the copper-cathode market tight.

GFMS says such stockpiling helped establish a floor for prices and inflated the premium for holding the physical.

Despite the physical market balance, the copper price still fell 9% last year.

This year there are concerns that overall Chinese economic growth is slowing and that the country’s copper financing trade may be unwinding. These two factors helped lower prices for the red metal even more this year, and in mid-March the copper price sunk to US$2.88 per lb. (US$6,350 per tonne), which was near a four-year low.

“Whilst many commodity markets have been on the back foot of late, the copper market has been particularly susceptible to weakness given its heightened exposure to the Chinese market, through both traditional end-use demand as well as finance-related routes,” wrote Rob Smith, a senior base-metals analyst at Thomson Reuters GFMS. “With the risks to the copper market skewed to the downside against a backdrop of rising mine supply and modest market surpluses, prices are likely to remain subdued over the rest of this year.” 

The increase in supply is due to miners following through on investments made during the boom years, as copper went from the US$1.20 per lb. (US$2,646 per tonne) range in 2005 to a US$4.61 per lb. (US$10,165 per tonne) high in early 2011. 

The survey estimates that global mine production grew by 8% last year to 17.8 million tonnes. And while Chile and the Democratic Republic of the Congo were the chief contributors to the surge, they were by no means the only ones, as GFMS says mine production increased across all regions, boosted by higher productivity at major mines, ramp-ups and commissioning of new projects, and expansions.  

While GFMS expects rising mine production will lead to a surplus this year, it points out that rising capital costs, easing prices and a more constrained mentality in the c-suite of copper miners could bring back tighter market conditions, although not until later in the decade. 

Refined output did not grow at the same rate as mine production last year, as it was only up 3% to 20.7 million tonnes. 

The reason for the gap ranges from technical problems at some smelters that were processing material from new mines, to maintenance shutdowns at other smelters, limited scrap availability and stockpiling concentrates in remote locations, GFMS said. 

The survey notes that the 4% increase in copper demand last year is an anomaly. GFMS points out that the increase came after demand was flat the year before and the demand spike was the fastest growth expansion since 2010.  

It attributed the uptick to China, where demand increased by 9% last year from 4% the year before. 

For 2013 global exchange inventories fell by 83,000 tonnes. 

Regarding the use of copper financing in China, it had become popular after the Chinese government made corporate loans difficult to come by in an effort to curb inflation. As a result, businesses turned to copper to use as collateral to secure debt. The trade was seen as a huge factor in demand, with analysts estimating that it was accounting for between 60% and 80% of Chinese copper-import demand. 

Declining copper prices and a weakening renminbi, however, unwound the trade and releashed copper back into the market. The GFMS survey argues that there will be more unwinding, but on a smaller scale than before.

“Such worries have added to the downside risks facing the copper market in light of prospects for improved metal availability going forward,” the report says.