Analysts Roskill take a close look at the big questions facing the copper industry following last week’s LME week events.
Late October saw the traditional gathering of the copper industry for LME week. Producers, consumers and traders from all parts of the value chain met to begin preliminary annual contract negotiations for 2020, to assess the current state of the market, and to consider its prospects for next year. Compared to the cautious optimism of a year ago, when the industry correctly determined that the physical market was fairly tight and prices were more likely to move higher during the first quarter of 2019 (as it subsequently played out), the mood this week has been sombre and subdued. On the plus side, LME cash copper prices have rallied 5% since the start of October, from US$5,610/t to US$5,883/t, on the positive sentiment that a signing of a Trump-China trade deal might bring. But on the negative side, these prices are still languishing 10% below the US$6,500/t price levels seen in April.
Some third-party assessments of the 24Mtpy refined market, place it in a statistical deficit of 300kt or more in 2019. However, this appears rather at odds with the rise in total exchange stocks so far this year and the seemingly easy availability of metal and soft spot premiums outside China. Producers have come into LME Week announcing their willingness, for most geographies, to maintain cathode premiums at 2019 levels, following the Codelco benchmark terms of US$98/t for Europe and US$88/t for China. However, with many consumers outside China witnessing a drop in demand this year, and seeing little forward visibility from their own customer base, this points to a protracted period of tense and tough negotiations ahead. For many, the outlook for 2020 appears even more uncertain than 2019.
2019 has been characterised by a series of supply side disruptions, the latest being the Asarco strike in the USA, road blocks to mines in Peru, and the knock-on effects to the copper sector of the anti-government protests in Chile. However, this has been counterbalanced by the unexpected weakness of demand, especially in China, the world’s largest consumer, where growth may only reach a very low single digit level this year. Chinese net imports of copper (in all forms) slumped 15% year-on-year in September, although this was relative to the record level of net imports in September 2018.
Another factor that has come to prominence this year is the much greater availability of copper scrap. The recycling industry has been forced to invest heavily in cable chopping and granulation lines to process scrap in its country of origin to a purity that is compliant with stricter Chinese import legislation. However, with the quotas for these imports now having been apparently fulfilled for 2019, there is currently a large surplus of heavily discounted higher-grade scrap supplies ready for use by secondary producers or consumers, in place of more expensive cathode.
The copper industry will reconvene in Shanghai for CESCO Asia Week from 18th November, with greater participation by Asian players. Coming so soon on the heels of LME Week, it is unlikely that any answers to the questions the copper industry is seeking will be revealed.
Roskill released the first edition of its NEW report, Copper Demand to 2035, in August 2019. Click here to download the brochure and sample pages, or to access further information.