Copper Market Outlookfiles.ctctcdn.com/951f515e301/652fee19-fe7d-4477-8091-db... · 2015. 11. 16. · Market balance not the whole picture in 2016 1.8 2.0 2.2 2.4 2.6 2.8 3.0-300-200-100

© 2015 CRU International Limited confidential1

Copper

Market Outlook

Prepared for:

American Copper Council, November 2015

Prepared by:

Matthew Wonnacott, Senior Consultant Copper


Structure of Presentation

Cathode market outlook: S&D dynamics in North America2

Copper price outlook: Strong headwinds to persist1

3 Conclusions



Global consumption: Weak

Global production: More cuts expected

Visible stocks: Moderate (and declining)

Investor position: Net short bias

US Dollar: Strong (and appreciating)

Cash operating costs: Declining

Conclusion: Downward pressure on prices to persist in 2016 (avg = 2.17 $/lb)

Copper price locked in a downward channel

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

2000 2003 2006 2009 2012 2015

LME 3M Copper price $/lb, daily,

Jan 2000-Nov 2015Key Trends for 2016:


-200

-150

-100

-50

0

50

100

150

Mar Apr May Jun Jul Aug Sep Oct Nov

LatAm Eurozone USA China Japan

Economic expectations have still not caught up with reality

Citi Economic Surprise Index, March 2015 - November 2015, daily data

Data: Citi, Bloomberg

Economic data

weaker than

expectations

Economic data

stronger than

expectations


70

80

90

100

110

120

130

Jan-15 Apr-15 Jul-15 Oct-15

USD CLP BRL

EUR CNY JPY

LME cash Cu price in various currencies,

indexed to January 1st 2015

Monetary policy – Tightening

bias

Monetary policy – Easing

bias

ECB PBoC

BoJ

B.C. de Chile

FED

B.C. do Brasil

(forced)

Monetary policy does not bode well for the dollar price of copper

Data: Bloomberg, CRU


Reasons to be cautious about global refined copper consumption

growth in 2016

Refined copper consumption change in 2016 (y-o-y%)

Data: CRU

> 6%

4% – 6%

2% – 4%

0% – 2%

-5% – 0%

< -5%

Asia

+3.0%

West

Europe

+1.5%

North

America

+2.3%

India

+5.7%

China

+3.2%Japan

+0.3%

Taiwan

+0.5%

E&C

Europe

-2.5%

World

+2.3%

South &

Central

America

-2.0%

ROK

+0.5%


Government policy-related consumption expected to pull growth

along in China in 2016

Forecast refined copper consumption growth by broad end-use in 2016, ’000t

Data: CRU

9,700

9,850

10,000

10,150

10,300


-300

-250

-200

-150

-100

-50

0

2015 2016 2017

Glencore’s announced cuts the largest so far The largest price related cutbacks and closures announced over the last 3 months (‘000t

contained copper)

Data: CRU


Growth in refined production to decline in 2016Refined production growth rate, forecast comparison

with before cutback announcements

Data: CRU

4.1%

5.5%

2.5%

3.4%

2.1%

4.0%

5.6%

1.1%1.3%

0%

1%

2%

3%

4%

5%

6%

2012 2013 2014 2015 2016

July - Before cutbackannouncements

Current

Losses in tonnage terms and by type of

production

-84

-291

-525

20

-83

-316

-900

-800

-700

-600

-500

-400

-300

-200

-100

0

100

2014 2015 2016

EW cathodeproduction

Electrorefined/firerefined cathodeproduction

Includes allowance

for as yet

unannounced

closures


Market balance not the whole picture in 2016

1.8

2.0

2.2

2.4

2.6

2.8

3.0

-300

-200

-100

0

100

200

300

400

500

2015 Q1 Q2 Q3 Q4 2016 Q1 Q2 Q3 Q4

$/lb’000t Cu World balance Price, rhs Low end High end

LME cash price and global supply/demand balance (after price-related cutbacks),

quarterly data, Q1 2015 – Q4 2016

Data: LME, CRU

Balances after accounting for SRB buying and price-related cutbacks

Strong USD

Cost deflation

Poor macro

environment



Cathode market outlook: Dynamics in North America2


3 Conclusions


China is the anchor for premiums and things have changed

there…

10%

14%

18%

22%

26%

3%

4%

5%

6%

7%

Jan-10 May-11 Sep-12 Jan-14 May-15

PBOC 1Y lending rate

Reserve ratio for Chinese banks, rhs

Annual contract premium in Europe has already been cut by 16% ($18/t) by Aurubis and

18% ($20/t) by Codelco

The sharp decline in borrowing

costs has blunted financing

demand

0

50

100

150

200

250

Jan-10 May-11 Sep-12 Jan-14 May-15

Cif Shanghai spot premium

Codelco's benchmark premium to China

Premiums in the spot market have

traded significantly below benchmark

terms all year


Chilean producers need to sell material displaced from Brazil

and China, arb makes N. America look more attractive in 2016

-60

-40

-20

0

20

40

60

1m

2m

3m

4m

5m

6m

Avg Sep 15 Avg Oct 15

Avg Sep 14 Avg Oct 14

Comex at a discount to the LME

Comex at a premium to the LME

LME-Comex arbitrage in the 6m

forward curve, monthly average, $/tChina’s ref Cu

production will grow

faster than consumption

Brazil’s economy is a

disaster!


North America suffers disproportionally when times get tough,

refined copper production to decline in 2016

Mine Majority

Owner

Notes

MiamiFreeport-

McMoRan

Loss of 18kt of SXEW

production

TyroneFreeport-

McMoRan

Loss of 19kt of SXEW

production

MorenciFreeport-

McMoRan

Lower grade of ore in 2016,

35kt less SXEW

Sierrita (concs)Freeport-

McMoRan

Loss of concentrate production

but no expected effect on US

cathode production

RayAsarco

(Grupo Mexico)

Loss of 7kt of SXEW

production

Buenavista Grupo MexicoMine ramp up,

30kt more SXEW production

Particular challenges for North America

-Developed region with lower ore grades and

higher average costs

-Lots of operations with molybdenum as a by-

product, the price of which is down 51% y-t-d!

-US mines do not enjoy any currency effects

when times get tough

1700

1800

1900

2000

2014 2015 2016

Refined copper production in N. America, ‘000t

After applying disruption allowance


Industrial – assumptions 2016

-Industrial production growth of

2.0% in 2016 up from 1.0% in 2015

-Rising real wages feeding

domestic demand

-Stabilization in oil and gas

Transport – assumptions 2016

-Vehicle production growth to slow to 2.0%

In 2016

-Some pent up demand has now been

exhausted

Utility demand in 2016

-Low energy prices harming growth in

renewable energy sector

-Copper telecom cable demand to contract

Construction – assumptions 2016

-Expectations for the sector are once

again very optimistic

-Driven by accelerating real wage growth

-Factoring in cautiously optimistic

growth of around 3%

Hopes pinned on construction again

Data: CRU estimates, company reports

Data: CRU

34%

15%14%

32%

Other, 5%

Estimated demand by end-use in North America, 2015


Despite modest demand growth, less supply from Freeport

will increase North America’s import requirement

Data: CRU

Data: CRU, GTIS

‘000 tonnes 2015 2016

Potential refined

copper production 1,972 1,881

Disruption

allowance -21 -59

Refined copper

demand2,186

(+0.3%)

2,238

(+2.3%)

Net import

requirement 235 416

2016 refined

copper demand

Canada

+1.0% to 156kT

USA

+2.3% to 1.67MT

Mexico

+3.0% to 413kT



Cathode market outlook: Dynamics in North America2


3 Conclusions


Price

• Copper price forecast to average 2.17 $/lb

• Global macroeconomic picture is not looking healthy, but supply

restraint has kept the physical market in OK shape

• However, investors unlikely to switch their short bias without finding

some clarity about China’s demand

• Copper price will have a strong headwind in 2016 from the USD

Cathode market

• Strong downward pressure on contract premiums from changes in

China and producers reallocating tonnages

• More value to be captured in the Comex-LME arb for 2016

• N. America to face more challenges from supply than other regions

and the region needs to increase imports of refined copper

Conclusions


Please feel free to ask

questions or get in touch!

Matthew Wonnacott

Senior Consultant, Copper Demand and

Markets

Email: [email protected]

Phone: +44 207 903 2099

mailto:[email protected]


Documents

Copper Market Outlookfiles.ctctcdn.com/951f515e301/652fee19-fe7d-4477-8091-db... · 2015. 11. 16. · Market balance not the whole picture in 2016 1.8 2.0 2.2 2.4 2.6 2.8 3.0-300-200-100