Copper Prices May Stay Low Following China’s Economic Slowdown
Copper prices were expected to experience a rebound as a result of announced cuts from Glencore plc (LON:GLEN), the world’s largest producer. However, like so many other commodities, copper prices are stagnating, even if this is not well reflected by Chinese import data. In fact, China actually imported some 460,000 tonnes of the metal in September, a 33% increase over August. (Source: “UPDATE 1 – China copper imports surge a third in September,” Reuters, October 13, 2015.) More importantly, this demand was not driven by processing for re-export.
Even in the face of a Chinese economic slowdown, the notion that demand for raw materials has dropped does not add up. The perception of low demand owes to the fact that while China continues to import high volumes of raw materials, it is doing so at lower prices. Considering volume rather than value, in September, China imported considerable amounts of oil, metals, and agricultural products, even if the commodities markets ignored this fact. These include less of the shiny commodities, like silver and gold, and more of the ones that are perhaps the most important to the actual economy. However, reflecting the Chinese economic slowdown, the demand for commodities is to feed the international market at dumping prices. Consider iron ore, for example. China imported some 86.0 million tons of iron ore in September 2015, which is just below the country’s record-high set in December 2014. (Source: “China Buys More Iron From Abroad as Steel Exports at Record,” BloombergBusiness, October 13, 2015.)
China also exported some 11.3 million tons of steel in September, a record in its own right. In the first nine months of the year, China exported the raw materials it was unable to consume itself, including some 83.1 million tons of steel, 27% more compared to the same period of 2014. (Source: “China Buys More Iron From Abroad as Steel Exports at Record,” BloombergBusiness, October 13, 2015.)
A similar pattern was seen in aluminum, re-exported by the Chinese after minimal processing to the tune of 3.6 million tonnes this year.
Then there’s oil.
China Import Data Shows Big Appetite for Oil
China imported 6.8 million barrels a day in September, which is the same as the United States. The last time this happened was in April 2014. (Source: “China Crude Imports Rebound as Refiners Seek Oil Bargains,” BloombergBusiness, October 12, 2015.)
However, as imports grew over the summer, exports of refined petroleum products increased by 65% over the same period compared to 2014. In the first nine months of 2015, Beijing has even become a net exporter of fuels, especially diesel fuel.
Meanwhile, considering the 20% lower amount of Chinese imports, a decline that has persisted for the past 11 months, the fact that raw materials cost less does not account for the significant drop. This suggests that there are doubts about the overall strength of the Chinese economy; so much so, in fact, that few expect China’s gross domestic product (GDP) data to meet Beijing’s announced seven-percent growth target for the third quarter.
While the Chinese economic slowdown does put considerable pressure on copper prices, there are also reasons to suggest that these could increase.
It is hard to be bullish on copper, given that a weak global recovery and the perception of lower-than-expected Chinese GDP in the third quarter have relegated the metal’s price, making it still about 25% lower than last year. Goldman Sachs expects prices, which are now about $5,260 per tonne, to drop to $4,800 per tonne by the end of the year.
In contrast, Capital Economics believes that copper will increase to $6,250 by the end of 2015, hitting as high as $7,000 by the end of 2016.
What is clear is that there is great uncertainty surrounding this commodity. So what factors could push copper up or down in the short- and medium-term?
Glencore, the world’s top copper producer, announced that it was considering shutting down production at its Mopani mine in Zambia and its Katanga mine in the Democratic Republic of Congo (DRC) for an 18-month period. This would lift some 400,000 tons of copper from the world market. In addition, as reported by Reuters, Newmont Mining will no longer export copper from its mines in Indonesia due to the nonrenewal of export licenses.
Climate Patterns to the Rescue: El Niño
This winter, in the northern hemisphere, the weather will be warmer thanks to El Niño, the phenomenon that occurs every seven years that brings warmer air to North America and usually heavy flooding to Chile and Peru, two major copper producers. In Indonesia, another major source of copper, El Niño causes an exceptionally dry climate, which dries up rivers and makes it next to impossible to transport copper ore from the mines to the island nation’s ports. (Source: “Copper price surges on South America supply cuts,” Mining.com, September 30, 2016.)
Clearly, if the weather event plays out according to historical precedent, and if Chinese import data figures are correct, there may well be a shortage of copper in 2016, suggesting Capital Economics’ predictions of $7,000 per tonne may be realistic.
Moreover, speaking of Chile, an 8.3 magnitude earthquake that killed at least 11 people and left a million people homeless, has ignited concerns over supplies of copper in the country, the world’s largest producer of the red metal. Although the Antofagasta and Codelco reported no damage to their mines, others had to close. The earthquake caused prices to hit $5,440 when news of its occurrence broke out. (Source: “LME copper at 8-week high after Chile quake sparks supply concerns,” CNBC web site, September 16, 2015.)