Copper stressed by inventory overhang, prices may touch Rs 290 per kg

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Mumbai | Updated: September 12, 2016 11:21:38 AM

Copper, a barometer of the global economic health, has been in doldrums so far this year.

copper pricesCopper, a barometer of the global economic health, has been in doldrums so far this year.

Copper, a barometer of the global economic health, has been in doldrums so far this year. The metal is not only the worst performer but also the only one in the base metals pack to have witnessed decline on year-to-date (YTD) basis. The price movement has been quite volatile with the metal plunging to levels as low as $4325.5/tonne.

Prime reason being China, which accounts for roughly 40 per cent of the global demand for refined copper, grew 6.9 per cent in 2015, the slowest in 25 years. In the first half of 2016, it registered an even lower GDP growth of 6.7 per cent. In addition, the International Monetary Fund (IMF) forecast in July’16 that China’s GDP growth this year could be 6.6 per cent, triggering concerns that the country’s economic slowdown is much deeper than perceived earlier.

Another factor that has become a cause of concern of late is the sharp rise in LME copper stocks at Asian warehouses. LME stocks are at their highest level since September 2015 at 3,34,975 tonnes. They surged by 45 per cent in August and are already up eight per cent so far this month after a series of deliveries into Singapore and South Korea.

Recent data releases from China too have not been encouraging enough to boost the metal. Chinese copper imports have been on a declining spree with Aug’16 imports falling further to 3,50,000 tonnes, the lowest in one year, due to slow seasonal demand and high domestic production.

Demand has been sluggish but supply is consistently gaining as Peruvian copper production surged by more than 50 per cent to just under 7,41,000 tonnes in the first half of the year. Increased production from Freeport’s Cerro Verde mine and the ramp-up of the Chinese-backed Las Bambas mine majorly contributed to the supply surplus in Peru, the second biggest copper producing nation.

Also, Glencore, the mining and commodity giant, said its copper production for the full year 2016 was expected to rise to 1.41 million tonnes, up a modest 20,000 tonnes from previous forecast following strong performances across several assets, including Collahuasi in Chile.

In line with rising supply, the International Copper Study Group (ICSG) in its latest monthly report stated that the copper market deficit in May narrowed to 65,000 tonnes from a shortfall of 144,000 tonnes in April.

On the contrary, Chile’s Codelco, the world’s top copper miner, may soon change its focus from cost reductions to output cuts, and its chief executive said the state-owned miner faces the “worst crisis ever” since 1976. Moreover, INE statistics latest data showed Chile copper production fell by 1.5 per cent month-on-month to 4,47,558 metric tonnes during July this year, owing to decline in lower ore grades at a number of copper mines. Copper production during the first seven months of the year totaled 3.227 million mt, down 5 per cent from the same period of 2015.

This could provide a cushion to copper prices as Chilean copper production is expected to fall further in the coming months due to strikes at Anglo American’s Los Bronces (4,37,800 tonnes per year) and Codelco’s El Salvador (49,000 tonnes per year) following wage negotiations.

Taking all the factors into consideration, copper prices are likely to fall further in 2016 towards $4200/t on the LME (CMP $4651) and Rs 290/kg on the MCX (CMP Rs 312). However, Chilean supply cut could provide a necessary support and restrict sharp downside.

(The author is associate director, commodities and currencies business, equity research and advisory, Angel Broking)

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