Copper surplus on the horizon, but will it reach the market in time?

The global market for refined copper will be roughly balanced between supply and demand this year before entering a significant supply surplus in 2022. This is the forecast from the International Copper Study Group (ICSG), which has just updated its two-year assessment of the market’s statistical landscape.

This year’s small delivery deficit of 42,000 tonnes will be swallowed up by a surplus of an estimated 328,000 tonnes in 2022. This surplus is largely the effect of a significant recovery in mining production.

What are copper analysts saying?

This is in line with a broad consensus among analysts that after several years of stagnation, global mining production will begin to grow again.

As this is expected to coincide with a slowdown in demand growth, particularly in China, there is no shortage of calls for copper to fall from its highs above $ 9,000 per tonne, at least for some time.

But the copper supply is in the habit of not meeting expectations, and not everyone is convinced. Goldman Sachs maintains its stubborn view, saying that the London Metal Exchange (LME) is aiming to reach $ 10,000 per tonne by the end of this year. Goldman Sachs claims that the price is governed by when the expanded range reaches the market.

The industry returns to showing production growth

Global copper mining production has been largely unchanged in recent years and increased marginally by 0.3 percent by 2020, according to ICSG. Growth is expected to accelerate to 2.1 percent this year and to 3.9 percent in 2022 thanks to a spread of new mining projects. The current trading volumes at CMC Markets shows that 60% are long, and 40% are short in copper at the moment. The prices are up 1.4% today. You can get started with copper trading at CMC Markets here!

Only two large copper mines have been taken into production in the last four years, the group notes, but five large projects will begin producing copper by the end of next year. The five are Kamoa Kakula in the Democratic Republic of Congo, Quellaveco in Peru, Spence -SGO and Quebrada Blanca QB2 in Chile and Udokan in Russia.

Together with increased production from scrap, this mining flow should lead to a similar size of refined copper production, which will exceed demand growth next year.

However, it is worth noting that ICSG has lowered its mining production forecast for 2021 from its most recent meeting in April, when the group expected growth of 3 percent.

Although new capacity has begun to increase, growth has been limited by “a slower-than-expected recovery in Peruvian production, reduced production of SX-EW (solvent extraction) in Chile, temporary closure of SX-EW mines in Myanmar and lower key ratings and operational issues at some mines, ”said ICSG.

Some of this year’s mining supply growth has been postponed to the next and it is quite possible that some of the 2022s will be postponed, especially if new projects have problems. Timing can be critical.

Problems covering short positions

The American investment bank Goldman Sachs predicts that most of the new offering will not reach the refined metal market until the second half of next year. Three quarters in a row of what is known as “supply stagnation” before then will not be enough to prevent visible stocks from falling to record lows by the end of this year.

The analysis, published on October 8, is entitled “Pricing to Scarcity” and Goldman Sachs not only retains its high direct price forecasts but suggests that long LME time spreads become “a kicker”. Goldman Sachs stands out with its views, but this investment bank is right that the existing stocks, or at least the known stocks, are low and that they risk falling significantly lower.

On the Chinese stock exchange, Shanghai Futures Exchange (ShFE), copper stocks reached a multi-year low of 43 percent2 percent tons at the end of September 2021.

The local market seems extremely tight despite the continued sale of copper from the state reserves. At the fourth auction last weekend, total sales amounted to 110,000 tons, and more auctions are expected soon.

The LME inventory is much higher with its inventory balance of 191,600 tonnes, but a series of cancellations over the past three weeks means that 70 percent of the metal in the British Stock Exchange’s inventory is now awaiting physical delivery. The remaining tonnage of 56,850 tonnes is the lowest since the beginning of March 2021, the stock balance amounted to 74,000 tonnes.

The nature of these cancellations – almost 10,000 tonnes per day since the beginning of the month – has led to many raised eyebrows in the London copper market (LME).

But as Goldman Sachs points out, whether this activity reflects real physical demand or is hoarding in anticipation of higher prices, the global inventory situation is very thin. The global visible stocks now amount to less than a week’s consumption, estimates Vanessa Davidson, head of base metals at the research house CRU Group.

The CRU is looking to lower the price of copper for the rest of this year and next year, when it is estimated at an average of $ 8,700 per tonne, but “small changes in inventory will have an excessive impact on both the upside and downside. said Davidson during Monday’s LME Week Seminar.

Large discrepancies in the forecasts

The CRU predicts a refined copper surplus of 100,000-200,000 tonnes in 2022, while Goldman expects a deficit of 189,000 tonnes.

The different calculations explain the difference in price talks, but the statistical gap between the two is marginal in a global market with a turnover of 25 million tonnes. A small shift in either supply or demand can easily push levels one way or another.

ICSG, which has the unenviable task of trying to make a statistical view of a complex and often opaque supply chain, is always cautious, acknowledging that “actual market balance sheet results have recently deviated from ICSG’s market balance forecasts due to unforeseen developments. ”

In other words, things are happening, especially in the copper market, which has a well-deserved reputation for negative supply-side surprises. Right now, however, low stocks have taken the market by surprise, with the relentless cancellation activity in recent days that has generated a significant tightening of time spreads in the options markets.

The benchmark cash-to-three-month spread traded at a modest $ 12 per tonne return earlier this week. The cash premium closed on Tuesday at fifty-five dollars and had increased to $ 95 on Wednesday, the lowest spread since 2014.

Goldman Sachs reminds that it is a current reminder that future surpluses are not very helpful if you need the metal now. Are you keen on trading with copper CFDs? Try CMC Markets today with a riskfree demo account.

Published: Tue, 19 Oct 2021 11:13
Author: Markus Jalmerot

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