(The following excerpt from The Commodity Refiner, a monthly publication of Barclays Capital Research, provides an overview of current copper and lead markets.)
The outlook for global copper supplies is perhaps grabbing more attention than usual at a time when the global refined market has moved into deficit and when some of the world’s largest copper producers are reviewing future production plans.
We estimate an approximate 670,000 tonnes per year of mine capacity (copper contained in concentrates) is currently idled because of the tough market conditions in recent years. Since the last long-term price trough, the operating environment has improved markedly. Not only are most copper miners cash-positive at current London Metal Exchange spot prices and with low treatment and refining charges (TC/RCs), but the massive supply surplus has also been eliminated since the output curtailments were announced in the fourth quarter of 2001.
As a result, we believe at least partial restarts are likely during the second half of this year, and we calculate that about 375,000 tonnes per year of currently idled capacity are vulnerable to restart. This amount consists of 85,000 tonnes per year at
Of concern is the remaining large stockpile of refined metal, especially with
Meanwhile, concerns over rising inventories of refined metal are mounting in China. Refined imports remain strong while domestic capacity is also being built. High physical premiums in the region have attracted additional metal, while activity overall has slowed down. Although still strong, Chinese industrial production growth has slowed to +13.7% in May from +20% in February. As a result, there is a distinct possibility that Chinese imports of refined copper will slow down during the second half of this year.
Such a slowdown would remove some support from the market, while the restart of idled capacity would provide fear that producer discipline, which has been such an important feature to the copper market over the past couple of years, would disappear. In addition, TC/RCs would move away from all-time lows, reviving the outlook for refining activity. But we believe a pick-up in Western World demand, associated with additional positive fund exposure, could well offset these issues and have positive price implications. The effects will be particularly dynamic should the low interest rate environment in the U.S. spur stronger-than-expected economic growth.
As a result, while we believe the overall uptrend will persist, supported by balanced market conditions at worst, the move higher is likely to be equally hesitant as in recent quarters, the reason being that a definite end of the economic downturn is not obvious. Moreover, Europe, which represents 24% of total copper demand, is lagging behind the U.S.
From the end of April until the beginning of June, market participants built fresh long exposure to copper that took prices toward recent highs of around US$1,750 per tonne, LME data suggest. In fact, this is confirmed by Commodity Futures Trading Commission data for speculative positions on Comex.
By the end of the second quarter, LME open interest for copper futures was relatively stable at around 200,000 lots per day, perhaps reflecting uncertainty among speculators over near-term direction. Trading volume reached 1.5 million lots in May, having slipped back to 1.3 million contracts in the previous month. As with aluminum, the other heavily traded metal on the LME, the volume of trade in copper has shown a substantial year-over-year increase of 12%.
Copper remains the second most heavily traded metal on the LME, and the 6% fall in turnover volume from the recent peak in March was accompanied by a fall in the price of 1.25% over the same period. The shape of the copper forward curve flattened significantly at the beginning of the second quarter, and the shape has been maintained since then. Nonetheless, the contango remains for all future traded dates (63 months).
Meanwhile, there have been fresh signs of nearby spreads tightening, which might indicate that the spot market is becoming increasingly short of material.
Monthly physical copper spot premiums have been strong for most of the second quarter on tight market conditions (despite no obvious improvements in underlying demand), enhanced by Codelco’s deliberate withholding of production.
While Asian spot premiums were very firm in May (above US$100 per tonne), upward pressure has eased during June (to US$75-80 per tonne), as there are signs of activity cooling in China. Nonetheless, Chinese premiums are likely to remain firm overall, following news that the government is stopping the 50% value-added tax and duty rebate given for copper concentrates, cathode and wirerod arriving from Russia, Kazakhstan and Mongolia.
Spot TC/RCs continued to fall in May. Mid-year contract talks for supply of concentrate from Chilean mines to Asian smelters are on hold until BHP Billiton makes an announcement on the implementation of production cuts at its Escondida and Tintaya mines.
As a result of improved market conditions since the output cuts were first implemented (in the fourth quarter of 2001), we believe at least a partial restart is likely in the second half of 2003, which should help ease the pressure on TC/RCs to the benefit of smelters. If mine output cuts are maintained, however, further falls in TC/RCs (already at all-time lows) are likely.
Copper has seen the largest inventory drawdowns in percentage terms among all base metals over the first half of the year, with the total LME copper stockpile having fallen by 170,000 tonnes, or 20%. In light of an overall subdued demand environment, we question the destination of this material, and fear at least a partial inventory build off-warrant. Nonetheless, end-use inventories are estimated to be low, and any stronger-than-anticipated pick-up in demand is likely to accelerate the declining trend in refined inventories. Still, the market is aware of the 200,000 tonnes per year being stockpiled at Codelco, which will be released once exchange stockpiles are below 800,000 tonnes (still above 1 million tonnes in June).
Cancelled LME copper warrants remained firm above 50,000 tonnes at the end of June, following the peak at 80,000 tonnes in May. This suggests there is still a significant amount of metal leaving LME warehouses, which is likely to keep the net trend downward.
Large copper imports to China in recent months are causing concern over extensive domestic stockpiling. In light of this, there is evidence of the Shanghai Futures Exchange’s copper stockpile having seen its low. The stockpile stood at about 70,000 tonnes at the end of the first half of 2003 (though that’s still considerably lower than 230,000 tonnes at the end of the first half of 2002).
Estimates of total reported inventories (producer, consumer, merchant and exchange) are showing encouraging signs of declining. We estimate they fell below the 2-million mark in the second quarter, for the first time since the fourth quarter of 2001. However, this is still close to historical highs, and the last time total copper stockpiles were of this size, copper was about 30% cheaper. Market conditions have significantly improved since then, with the large supply-demand balance now rectified.
Owing to declines in total copper inventories and some modest improvements in demand, we estimate total inventories now represent 8.4 weeks of current Western World consumption, which is the lowest since
mid-2001. A continuation of this trend, which we believe is likely, is expected to have supportive price implications.
As with aluminum, the latest Chinese trade statistics for copper were encouraging. Net imports for May were the highest since August 2002, at 121,400 tonnes, leaving January-to-May net imports at 488,600 tonnes. If this rate of imports were to continue, full-year exports would exceed our expectations of 900,000 tonnes with a margin, and underpin copper prices.
Firm premiums in the region have encouraged this development. However, there are mounting concerns over rising refined stockpiles in China, which should help slow down the rate of imports in the second half. Copper-in-concentrate imports were also sharply higher (+50.6%, year over year, in January-May at 1.1 million tonnes), indicating that China is ramping up refined capacity in an attempt to meet domestic demand.
Statistics from the International Copper Study Group (ICSG) show the global copper market was in a 73,000-tonne deficit during the first quarter of this year, compared with a surplus of 213,000 tonnes in the corresponding period a year earlier.
The move from balanced market conditions in the first two months of the year resulted from a 6.3% year-over-year rise in world usage (to 1.4 million tonnes) in March and a 1% year-over-year decline in total refined production (to 1.3 million tonnes). Usage in Europe recovered strongly in March (+28%) following a weak February. Asian usage remained strong, while refined copper usage in the U.S. was down 2% year over year.
In contrast to refined output, mine production has started to climb, and the relationship between mine and refined output has returned to more balanced conditions.
Lead
Key features established in the first part of the year — capacity closures and weak demand — remain topical.
So far, about 300,000 tonnes per year of refined lead have been removed from production this year. Most of the closures have been in Europe, in particular
This has had a positive impact on the global market balance so far this year. However, China continues to win market share. In fact, primary refined lead capacity in China has risen by 75% (to 1.5 million tonnes) over the past five years alone, and there is still plenty of spare capacity to operate if more concentrates were available. Nonetheless, enough is being produced to ramp up export volumes of refined lead to the Western World, and the latest customs statistics show shipments are returning to the levels of 2000-2001, when annual exports were well above 400,000 tonnnes. This year, we have assumed Chinese net exports of 370,000 tonnes, which might be on the low side as January-to-May exports were already 178,000 tonnes.
When it comes to demand, the outlook is not so bright, even if economic activity surprises on the upside. Demand for lead is the least correlated with economic activity among the base metals, primarily because replacement batteries are a major end-user, and battery lives are being extended.
Consequently, rationalization of the global battery market might be the next step, while restructuring of the lead market has continued. In light of this,
The lead concentrates market is still very tight, with spot treatment charges (TCs) continuing to trade around their lowest in almost 10 years.
The bulk concentrates market changed following closures of European smelters (Avonmouth and Noyelles-Godault, and conversion of Duisburg to secondary production), though McArthur River’s (MIM) bulk concentrate has easily found its way to other customers.
Physical lead spot premiums remain firm overall, with upward pressure in Europe in particular, following capacity closures earlier in the year and low inventory levels in the region.
Premiums are likely to remain firm, especially if further smelter closures take place and as it appears likely that the 35,000-tonne-per-year Titov Veles ISF smelter in Macedonia will close. However, any loss of production would partly be offset by higher production at Bulgaria’s OTZK, which is planning to produce 15,000 tonnes this year, compared with 7,000 tonnes last year.
Inventories held at U.S. locations continued their upward path during the second quarter, with another 8,000 tonnes entering U.S. locations, and Baltimore maintains its leading position. Soft demand, in combination with Asian deliveries, are factors behind the steady rise.
Although the total LME lead stockpile is substantial, near-term outflows can be expected. The stockpile remains substantial, with no major drawdowns reported at any holders in recent months.
Producers are holding about 156,000 tonnes, according to the International Lead and Zinc Study Group, while consumers hold about 130,000 tonnes. Measured as weeks of total Western World consumption, total reported stockpiles now represent roughly 4.6 weeks of current consumption, which is largely unchanged compared with levels at the beginning of the year.
The latest statistics from the ILZSG for April show the global lead market registered a sizable 108,000-tonne deficit in January-April, compared with a 78,000-tonne surplus in the corresponding period of 2002.
While Chinese net export levels are still relatively subdued in a historical context, these statistics reflect improved market conditions as global refined output was 1% lower in April, year over year, and consumption, 7.8% higher.
— Kevin Norrish is head of commodities research/energy and Ingrid Sternby is the base metals analyst for Barclays Capital Research. The opinions presented are the authors’ and do not necessarily represent those of the Barclays group. For access to all of Barclays’ economic, foreign-exchange and fixed-income research, go to the web site at barclayscapital.com. Queries may be submitted to the authors at kevin.norrish@barcap.com and ingrid.sternby@barcap.com
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