 "Chinese financial market reforms hit copper speculators")
Copper prices have fallen to nearly a three and half year low on heavy short selling since the beginning of the year by funds and speculators linked to China.
They started betting against copper, coinciding with unravelling of a domestic bond default in China, the world's largest importer, producer and consumer of the metal. More than half the Chinese imports are used as collateral to raise capital for investment in real estate and other high-yielding assets. Short sellers also took into account Beijing moves to control shadow banking, where credit is available with pledged copper. Surprisingly, price falls have not dimmed the enthusiasm of major mineral and metal groups to expand mine and smelting capacity.
According to business intelligence services provider SNL Financial, mine capacity expansion by industry leaders would bring into the market anything between 1.1 million tonnes (mt) and 1.3 mt of copper a year by 2016. This will be in sharp contrast to long periods of supply disruptions, caused by strikes in major mines and recovery of ore with falling copper content from ageing pits. Not every expert will, however, agree that copper now, in a tight bear grip, will not lead smaller groups to go slow on mine expansion. They will wait for turnaround in copper before resuming mines capacity expansion. But the red metal is destined to remain under pressure for at least a couple of years, as some major mine development projects remain at final stages of completion.
BHP Billiton, which has a highly profitable copper portfolio, says on completion of current projects by major miners, new supplies will "all but vanish." Therefore, post-2016, the world demand for the metal should be running ahead of supply. That will be time for copper to come back in strong reckoning of operators. For sustainable robustness in copper demand, big producers continue to pin their faith on China, despite the world's second largest economy hitting a rough patch and its manufacturing sector slowing. BHP is also hopeful of the global economy strengthening as we go forward. For example, the US manufacturing sector recorded largest output growth in six months in February. This should support copper demand growth in the world's second largest market for the metal. Industrial production growth in Japan, European Union, particularly Germany and the UK is strengthening. All this, according to BHP, will lift demand for commodities, including copper "albeit at more moderate rates of growth". It further argues that in the longer term, performance of commodities will be linked to "fundamentals of wealth creation and urbanisation".
Besides China, emerging economies, India in particular, are where surplus copper to be generated from new mines will get absorbed.
"India's per capita consumption of copper is ridiculously low at close to half-a-kg against 5.5 kg in China, about 11 kg in the US and the world average of 2.5 kg. Urbanisation and the expanding power sector will be the two principal strands on which future copper use in India will grow. Expect China's per capita use level to come progressively closer to the US level and India's to the global average," says an industry official. India's copper use of over 600,000 tonnes constitutes a small portion of the world production of around 21 mt. Last year, India's refined copper production amounted to 691,210 tonnes, including 353,000 tonnes by Vedanta, 314 tonnes by Hindalco and 24,210 tonnes by Hindustan Copper. Except for Hindustan Copper, the other two groups depend entirely on imports of concentrate to run their smelters.
Their earnings depend upon treatment and refining charges (TC/RC) embedded in concentrate prices. Processing charges are subject to fluctuations, depending on global supply of concentrate. Smelters without mines linkages get higher TC/RC in surplus concentrate supply situations. The opposite is the case when shortages occur. In recent months, the charges have moved in a range of 10 to 13 cents a pound for standard concentrate for delivery to China.
They started betting against copper, coinciding with unravelling of a domestic bond default in China, the world's largest importer, producer and consumer of the metal. More than half the Chinese imports are used as collateral to raise capital for investment in real estate and other high-yielding assets. Short sellers also took into account Beijing moves to control shadow banking, where credit is available with pledged copper. Surprisingly, price falls have not dimmed the enthusiasm of major mineral and metal groups to expand mine and smelting capacity.
According to business intelligence services provider SNL Financial, mine capacity expansion by industry leaders would bring into the market anything between 1.1 million tonnes (mt) and 1.3 mt of copper a year by 2016. This will be in sharp contrast to long periods of supply disruptions, caused by strikes in major mines and recovery of ore with falling copper content from ageing pits. Not every expert will, however, agree that copper now, in a tight bear grip, will not lead smaller groups to go slow on mine expansion. They will wait for turnaround in copper before resuming mines capacity expansion. But the red metal is destined to remain under pressure for at least a couple of years, as some major mine development projects remain at final stages of completion.
BHP Billiton, which has a highly profitable copper portfolio, says on completion of current projects by major miners, new supplies will "all but vanish." Therefore, post-2016, the world demand for the metal should be running ahead of supply. That will be time for copper to come back in strong reckoning of operators. For sustainable robustness in copper demand, big producers continue to pin their faith on China, despite the world's second largest economy hitting a rough patch and its manufacturing sector slowing. BHP is also hopeful of the global economy strengthening as we go forward. For example, the US manufacturing sector recorded largest output growth in six months in February. This should support copper demand growth in the world's second largest market for the metal. Industrial production growth in Japan, European Union, particularly Germany and the UK is strengthening. All this, according to BHP, will lift demand for commodities, including copper "albeit at more moderate rates of growth". It further argues that in the longer term, performance of commodities will be linked to "fundamentals of wealth creation and urbanisation".
Besides China, emerging economies, India in particular, are where surplus copper to be generated from new mines will get absorbed.
"India's per capita consumption of copper is ridiculously low at close to half-a-kg against 5.5 kg in China, about 11 kg in the US and the world average of 2.5 kg. Urbanisation and the expanding power sector will be the two principal strands on which future copper use in India will grow. Expect China's per capita use level to come progressively closer to the US level and India's to the global average," says an industry official. India's copper use of over 600,000 tonnes constitutes a small portion of the world production of around 21 mt. Last year, India's refined copper production amounted to 691,210 tonnes, including 353,000 tonnes by Vedanta, 314 tonnes by Hindalco and 24,210 tonnes by Hindustan Copper. Except for Hindustan Copper, the other two groups depend entirely on imports of concentrate to run their smelters.
Their earnings depend upon treatment and refining charges (TC/RC) embedded in concentrate prices. Processing charges are subject to fluctuations, depending on global supply of concentrate. Smelters without mines linkages get higher TC/RC in surplus concentrate supply situations. The opposite is the case when shortages occur. In recent months, the charges have moved in a range of 10 to 13 cents a pound for standard concentrate for delivery to China.