(The opinions expressed here are those of the author, a columnist for Reuters.)
LONDON (Reuters) - The global refined copper market recorded another year of supply-usage deficit in 2017, according to the International Copper Study Group (ICSG).
The Group’s preliminary assessment is that the headline shortfall was 163,000 tons or, adjusting for changes in Chinese bonded warehouse stocks, an even more marginal 135,000 tons.
In the context of a 23 million ton global marketplace, these are very fine balances indeed.
Moreover, copper supply and demand were almost evenly matched in the last quarter of 2017, suggesting that copper’s deficit dynamics are ebbing.
However, the real story in the ICSG’s first take on last year’s statistical landscape hides behind the headlines.
Copper scrap, the often overlooked component of both market dynamics and price, played a starring role in determining that landscape.
Graphic on ICSG’s estimates of market balance 2013-2017:
A FINE BALANCE
Copper bulls have loved a narrative of supply deficit ever since the years of chronic shortfall, when the London Metal Exchange (LME) price shot up to its all-time high of $10,190 per ton in February 2011.
And the deficit narrative is alive and kicking again as the market collectively ponders the ominous combination of declining mine grades, lack of investment in new supply and the demand accelerator that will be the electric vehicle revolution.
But last year’s “deficit” of 135,000 tonnes is almost too small to have market significance, being equivalent to a 0.6-percent margin of error in global usage.
Keep in mind the statistical labyrinth that is global copper demand, particularly in China, where the ICSG employs an “apparent usage” calculation based on the country’s own production and net imports.
The broader picture over the last few years is of a steadily diminishing deficit to the point of market balance in the closing months of 2017.
The ICSG’s preliminary take on the fourth quarter of last year is a 7,000-tonne surplus, or 2,000 tonnes when adjusted for an assessment of how much is in China’s bonded warehouses.
The Group’s last forecast in October was for another statistically marginal deficit of 104,000 tonnes this year.
Playing a key part in the copper market’s balancing act has been scrap, or “secondary”, copper.
The copper price endured five years of falling prices until bottoming out in January 2016 at a low of $4,318 per ton.
The recovery to last December’s highs above $7,300 unlocked a store of scrap metal that had been hoarded during the down years and which has been flowing through the supply chain ever since.
World refined copper production rose by 0.6 percent last year and it only managed that anemic growth rate thanks to a 4.5-percent rise in secondary production.
Secondary production had declined to 3.87 million tonnes in 2016, when prices were at their low point, but jumped to 4.04 million last year.
Excluding the contribution of refiners processing scrap, global refined production actually fell by 0.15 percent in 2017, according to the ICSG.
Strikes and smelter downtime hit refined production in Chile, Japan and the United States, the world’s second, third and fourth largest producers respectively.
Production of straight-to-metal copper from mines with SX-EW (solvent extraction-electrowinning) capacity also fell by 3.0 percent last year.
However, being used as an input to make new refined copper is only one of scrap’s roles.
Its other is as a direct melt input into the process of manufacturing copper products, where it acts to displace the need for primary metal.
Thus, “improved scrap supply constrained world refined copper usage growth globally in 2017,” the ICSG noted.
The Group’s headline calculation is that “apparent”, and emphasis on that word, global usage rose “modestly” by 0.7 percent last year.
Graphic on global mine production, basis ICSG:
MINE PRODUCTION FALLS
Scrap is a massively important, but statistically opaque, balancer of the market.
The copper supply chain needed it last year to offset a 2.0-percent decline in global mine production. Complementing the slide in SX-EW output was a 1.6-percent fall in concentrates production.
That, more than anything else, was down to the 43-day strike at the Escondida mine in Chile in February and March of last year.
Escondida is the world’s only mine with capacity to produce in excess of one million tonnes of copper a year, which means that a prolonged operational hit such as that last year is capable of moving the global dial.
It’s why the mine is once again the focus of market attention this year. Last year’s prolonged industrial dispute was never resolved, the existing contract merely being rolled forward a year for renewed negotiations.
Escondida was not the only hit to copper supply last year but it was the biggest and once it resumed operations, global output bounced higher. It was up 10 percent in the second half of the year relative to the first, according to the ICSG.
MORE DISRUPTION IN 2018?
Labor negotiations at Escondida and at the many other mines with expiring contracts represent multiple sources of potential price disruption this year.
But so too does scrap.
How long will the scrap supply surge last? The copper price recovery has lost momentum over the last couple of months with the LME three-month price currently trading at $6,750.
Together with finite amounts of hoarded scrap, that should mean the scrap effect fades over time as the supply bulge moves down the supply chain.
A complication comes in the form of China’s confusing profusion of new rules on imports of all sort of scrap products, including copper.
News of a ban on imports of “Category 7” scrap last July propelled LME copper through the $6,000-per tonne level.
That ban, effective the end of 2018, has already disrupted material flows as this lower grade material, which has to be disassembled before being processed, is redirected to other Asian countries.
A tightening of the rules on who can import metal is still playing out while down the line loom changes to minimum impurity levels.
No surprise, this being scrap, that the details and potential ramifications on the rest of the copper supply chain remain frustratingly sketchy.
It’s an intriguing variable in a global market forecast to be in a 104,000-tonne deficit.
Which is perhaps better viewed as a finely balanced match between supply and demand. Just as was the case in 2017.
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