Macquarie Research notes that the International Copper Study Group’s (ICSG) monthly summary of the state of the copper market “is a useful, if backward looking, indicator of trends in copper production and demand. The latest data, which runs though February, underlines the extent of the collapse in demand in the world ex China. As the data covers the period in which Chinese imports were only just starting to ramp up, it not surprisingly shows the market in significant surplus for the first two months, but actually in small deficit in February alone.
“Although figures showing heavy declines in demand no longer come as a surprise, we still find the scale of the downturn in demand in the world ex China in the early part of the year quite amazing. The ICSG data shows ‘usage’ down by 17.9% YoY in the first two months, and demand in the US down by 24.5% YoY and European demand down by 22.3% YoY.
“Were it not for a 32.7% YoY increase in Chinese apparent demand, the copper market would have been an absolute disaster. As it turns out, with China vacuuming up metal at an incredible pace, world demand was down by only 4.4% YoY in the first two months.
The ICSG data shows copper production continuing to struggle. The group estimates that mine capacity grew by 4.8% YoY, but mine production was up by only 2.6% YoY. On the refined production side, primary refined output was up, but was virtually neutralised by a reduction in secondary refined production, leaving total refined production up by only 0.6% YoY. By contrast, total refining capacity is estimated to have risen by 4.7% YoY.
This lack of supply growth, together with the strength of Chinese buying, has left the copper market roughly in balance – a remarkable outcome in this economic climate. Copper prices rallied from below $3,100/t ($1.40/lb) at the start of the year to around $4,800/t ($2.20/lb) by mid-April. Since then, prices have fluctuated in a wide range around $4,400/t ($2/lb), but have struggled to break out to new highs. The price is now looking vulnerable to a retracement – perhaps back to around the $4,000/t ($1.80/lb) level, Macquarie suggests.
Macquarie Research says “feedback from our China Commodities Conference this week has given us more confidence in the strength of underlying Chinese consumption growth this year, but has still left us with the impression that we are coming towards the end of the strongest period for Chinese copper imports, and imports through the second half will be considerably lower than in the first half.
“As a result, there still appears to be a high risk of a retracement in copper prices through the third quarter. However, with sentiment about global economic growth clearly improving, we believe that a ‘buy on dips’ mentality will support prices at a higher level than we had previously believed (previously, we had feared that copper could return to around $1.50/lb [or $3,300/t]).