Supply from new mines and higher utilisation of smelters could increase the overall output
The world copper market is interestingly poised.
It is starting the year 2014 with a small deficit, but is set to end the year in a surplus.
The surplus may continue for quite some time, thanks to substantial additions to supply over the coming years.
As a result, demand is unlikely to be constrained by prices while such prices may limit additional capacity. In 2013, there was a combination of strong growth in mine supply, weak growth in scrap supply as well as decline in capacity utilisation in smelters, as a result of which global supplies increased. In 2014, new mine supply should expand more rapidly and smelters are expected to operate at a higher utilisation rate, raising overall output.Demand versus supply
The big question that market participants are debating is whether the surplus will be short-lived. The question is prompted by the Chinese state grid announcement of a 13 per cent increase in spending this year, which will boost consumption demand. The positive correlation between power transmission and distribution and copper consumption is, of course, well known.
A section of the industry and trade believes supply growth may peak this year and begin to slow from 2015 onwards.
Along with a recovery in global growth, signals for which are already visible, a potentially tighter market may be developing, with concomitant effect on prices.
In the US, the gradually strengthening economic recovery is expected to result in a period of above-trend growth in demand for copper. In Europe, after suffering for three years, demand is likely to bounce in the second half of the fiscal.
As the European economy steps away from the pain of acute fiscal austerity, there is scope for households and businesses to reinvest in their depreciating capital stock — houses, vehicles, plant and machinery. The mover and shaker of the world copper market, China is also expected to see growth in apparent demand in tandem with its restocking policy.
Indian consumption of copper has been constrained by the weakness in economic growth and depreciating currency.
Clarity in Government policy relating to mining should help increase supplies of locally produced metal, supporting potential growth in consumption. Experts see India consumption growth of 6-7 per cent over the next two years.
So, based on solid growth in BRIC countries and backed by a modest improvement in G3 demand, global demand for copper may expand by about 5 per cent in 2014 and 2015.
Will low copper prices and poor profitability of global mining companies affect plans for investment in new copper projects? Many of the western producers are selling non-core projects and delaying longer-term plans.
However, miners are going ahead with projects that are nearing completion which, in turn, suggests rather limited negative impact on output in the near future. For some mining companies, copper output remains one of the more profitable parts of their business which suggests that cutbacks elsewhere may not necessarily impinge upon investment plans for copper.Price outlook
An important development in the copper market is the changing impact the Chinese copper industry has on global copper prices.
Until a couple of years ago, Chinese demand tended to exacerbate the swings in copper prices (LME) with storing demand during periods of rapid economic growth boosting prices significantly even as weakness in Chinese demand led to a collapse in prices during 2008-09.
Since last year, Chinese influence on copper prices has clearly moved from pro-cyclical to counter-cyclical, according to experts. Chinese copper users have changed tack and accumulate stocks during periods of low LME prices and de-stock when prices rise. So, the Asian power has the ability to dampen price volatility.
In 2014, copper prices are likely to average $7,200 a tonne with peak prices likely to occur during the early part and then gradually softening.