Copper 02 (Nov 12 - Dec 25)

[behappyalways]

The copper market: Red scare

Ebbing Chinese demand for copper explains much of this week’s turbulence in mining stocks

ALONG the muddy banks of the River Severn in Newport, Wales, sits the “mega-shredder”, an industrial monster owned by one of the world’s biggest metal-recycling firms, Sims Metal Management. It is one of the planet’s biggest consumers of metals—literally.

Every hour the 560-tonne machine gobbles up more than half its weight in cars, washing machines and other appliances, making the earth shudder as it grinds them to pieces. It then uses magnets to separate the ferrous from the non-ferrous bits, spitting out small nuggets of steel, copper and other scrap.

These are shipped to smelters in Asia, where they are mixed with ore and re-blasted into the rods and sheets that feed that other great devourer of metals, China.

A decade ago, when the machine was installed, China’s hunger for scrap seemed insatiable. Plumbers the world over developed a nifty side business as copper merchants. Theft was so rife that Britain banned cash payments for scrap metal. But in the first half of 2015 exports to China were half the level of 2012, when demand was at its peak, says Ian Hetherington of the British Metals Recycling Association. Scrap dealers’ hunt for customers is getting desperate.

“I have people from small and midsized companies who spend half their lives going round the copper smelters in dim and distant parts of China,” he says.

It is not just scrap dealers who are suffering from slowing demand for metals in China. On September 28th shares of Glencore, a debt-laden Anglo-Swiss miner and trader, fell by almost a third, despite the firm’s attempt to buttress its balance-sheet in recent weeks by raising $2.5 billion of equity and suspending the dividend.

Shares of Anglo-American, a London-based mining firm, also took a beating. Even after a subsequent rebound, Glencore’s shares have fallen to a sixth of their level at its listing in 2011. There is even talk of taking the firm private again—although financing such a step would be tricky.

The trigger for the latest plunge was a note from Investec, an investment firm, speculating that if weak prices persist, Glencore’s and Anglo’s earnings would be consumed by debt repayments and servicing, eventually wiping out the value of their share capital.

It noted that the biggest global miners, Rio Tinto and BHP Billiton, though less indebted, were also likely to see rising debt ratios if prices remained low, which might threaten their ability to maintain dividends, much like at Glencore. It said the mining industry had “gorged” on cheap debt during the China-led metals boom of recent years. Now it is paying the price.

The commodity that accounts for the biggest share of Glencore’s revenue is copper. Like most industrial metals, its price has fallen steadily in recent years, with a predictable effect on Glencore’s shares (see chart). The sharp slowdown in industrial activity in China is disastrous for copper producers, since China consumes 45% of their output.

Its attempt to shift from an investment-led economy to a consumer-led one has raised fears of a structural decline in the amount of copper it will need. However much electrical wiring there is in consumer goods, it does not match the vast tonnages consumed during the recent decades of rapid urbanisation in the form of power lines, telecoms cables and the wiring of big apartment complexes.

Estimates of short-term Chinese copper demand vary. Deutsche Bank reckons it will grow by 3% a year on average over the next five years, down from 7.5% over the past five. Goldman Sachs, another bank, takes a particularly bearish view, saying Chinese copper consumption will not grow at all this year and next.

One recent disappointment has been the roll-out of electricity infrastructure in inland Chinese cities, where investment was expected to surge this year. Analysts at BHP say such infrastructure accounts for the biggest share of copper consumption in China, more even than the construction industry.

Yet a crackdown on corruption at state-run energy companies slowed the grid-laying projects during the first half of the year, analysts say. What is more, China is increasingly using aluminium for its thick power-distribution cables, rather than copper—a cheaper option, even if aluminium is a poorer conductor.

Spending on other infrastructure is accelerating, but it is unlikely to be enough. Property construction accounts for a much bigger share of Chinese investment and, with unsold homes dotting the country, is unlikely to rebound soon. Moreover, copper is needed at the end of construction, for a building’s wires, pipes and air-conditioning systems, as well as home appliances.

Housing completions have plummeted by 15% so far this year; housing starts are even weaker. Though property sales are up, the number of white goods needed to fill the newly sold units is unlikely to be enough to tighten the market.

Alongside industrial attrition, copper has been under speculative attack in China too. Chinese hedge funds, dissuaded by the government from “rumour-mongering” about stocks, have launched sporadic “bear raids” on copper as a proxy for betting against China’s economy. Kenneth Hoffman, a copper specialist at Bloomberg Intelligence, a data firm, describes the size and power of these firms as “chilling”.

Speculators’ ability to roil markets is aided by inadequate data on copper stocks in China. The murky numbers on warehousing and the strategic stockpiles of China’s State Reserve Bureau have led some, such as Mr Hoffman, to believe the data overstated the strength of copper demand in China even during the good times.

Yet the outlook for China is not all bearish. As incomes increase, the “intensity” of copper use is likely to grow. China is still well short of the average-income level at which consumption of copper peaked in Japan, for instance. Nascent industries such as wind and solar power and electric vehicles, all of which are copper-intensive, may also boost future demand.

Before then, supply must fall to balance the market. After a brief rally, copper traders shrugged off Glencore’s announcement last month that it would close mines in the Democratic Republic of Congo and Zambia, cutting supply by about 400,000 tonnes over 18 months—some 2% of the world’s annual output.

Some estimate that the industry will still churn out about 500,000 tonnes of excess copper this year. Eleni Joannides of Wood Mackenzie, a research firm, expects that by the end of the year global copper stocks will amount to 80 days of average consumption, higher than during the 2008-09 global financial crisis.

That oversupply will get worse: it takes several years to build a mine, so several firms were caught out when the market turned. As a result big new increments of supply have hit the market in the past year or two, just at the wrong time. Stocks will not peak until 2017, Wood Mackenzie predicts.

Glencore is not the only global miner to respond by cutting output. Ms Joannides says mines producing a further 170,000 tonnes a year have been idled so far this year. But only the most expensive supplies are being removed from the market. Many firms, helped by falling currencies in countries like Chile and Peru, are instead slashing costs to keep production going.

The industry’s fragmentation makes it unlikely that producers will agree to rein in output. Goldman Sachs notes that iron-ore producers continue to increase output, even though four of them control 65% of the world’s production; in copper the top five producers have only a third of the market. In some cases, it is cheaper over the long run to keep mines running at a loss for a while, to maintain security and retain staff, rather than to close them down.

Within a few years, however, many analysts expect natural constraints to put a floor under prices. The quality of ore in copper mines decreased during the boom. Water shortages make copper more expensive to extract. Mine depletion in Chile and Peru has driven companies towards new deposits laced with arsenic that require costly cleaning. And workers and environmentalists increasingly raise their voices against lousy pay and conditions.

Higher costs make it less likely copper production will increase, which should eventually help stabilise the market. Chinese demand may also be supplemented by growth in other emerging markets, such as India, which consumes just 2% of the world’s copper.

The challenge for the big diggers like Glencore, and the “urban miners” such as the mega-shredders and scrap dealers, is to hold out until then. That is far easier to do without big debts to service.

Source: The Economist

[behappyalways]

Hedge Funds Are Playing `Dangerous Game' With Copper
http://www.bloomberg.com/news/articles/ ... r-rio-says

[winston]

Copper

Goldman continues to expect that copper prices will fall to $4,800 a ton by year-end, down from current levels of $5,344 on the London Metal Exchange.

"Of particular importance to copper has been weakness in China," the group noted.

"The ongoing weakness in demand has recently led to some major supply curtailments."

Source: GS

[winston]

Hedge Funds Are Playing 'Dangerous Game' With Copper

by Jesse Riseborough

Source: Bloomberg

http://www.bloomberg.com/news/articles/ ... r-rio-says

[winston]

DON'T TURN YOUR BACK ON COPPER by Sean Brodrick

Boy, the mood on copper has tarnished lately. The industrial metal has fallen more than 5% in the last two weeks alone and is down 17% so far this year. It even hit a six-year low in August.

But let me show you some charts that suggest the situation for copper is not as dire as it seems. In fact, we could be in for an upside surprise this year.

What's hurting copper in the short term? In a word: China.

China's economy is slowing down at the same time that it is transitioning from a manufacturing to a more consumer-focused economy. In other words, one that needs less copper.

And that worries copper traders. China accounts for about 40% of all copper consumption on Earth. Total global consumption is expected to be around 23 million metric tons this year.

And the copper bears have found plenty of recent news to hang their furry hats on.

According to the World Bureau of Metal Statistics, global copper usage fell 2% in the first half of the year. China's usage of the metal dropped around 1.2%.

Household appliances account for more than 14% of total copper consumption in China. So bears point out that China's air conditioner market grew only 5.2% in August - a 26-month low.

Automobile sales account for another 10% of China's copper consumption. And auto sales in China dropped 3.4% to 1.4 million units in August. That's three consecutive months of declines.

But all is not bearish for the global copper market. For example...

Any surplus in the market is being worked off. Data for June from the International Copper Study Group (ICSG) showed that the copper market was almost balanced in the first half of 2015, with a 19,000-tonne surplus.

Stocks of copper are lower in bonded warehouses for the London Metals Exchange. Those stocks were previously at 323,975 metric tons. That's down 30% since late August.

China's copper imports rose more than 20% in September from August to 351,956 metric tons.

And here's the thing about China's economy. Sure, it grew at an annual rate of 6.9% in the third quarter this year. But that barely beat expectations and it was the slowest quarter of growth since the beginning of 2009.

So one thing really weighing on the copper market is that the big banks are trotting out forecasts of doom for China's economy. They say it's growing only 5%... 4%... 3%!

Rumors of China's Death Are Greatly Exaggerated

China's President Xi Jinping doesn't agree. He must be feeling feisty because he was recently quoted by the state media on economic growth. He didn't say the country will grow 3%... or 4%... or 5%. He said that China's economic growth will be no less than 6.5% over the next five years.

So you think he's over-guesstimating? China has trillions of dollars in foreign reserves to throw at problems. I reckon the country can keep at it longer than a lot of bears can remain solvent.

But let me tell you this. Even if China is growing at only 5%, it's still going to use a LOT more copper in tonnage terms. Heck, China devoured a record 9.4 million metric tons of copper last year. That's way, way up from just 3 million metric tons in 2003.

And that brings me to the first of my charts, which I picked up at a private meeting at the New Orleans Investment Conference last week. This chart shows that the growth rate of China's copper demand is going to slow down.

China's annual growth rate

But that market has been growing very fast for a long time. So a slower growth rate may not be that big of a deal. In fact, as the second chart shows, even with a slower rate of copper consumption growth in China, total global copper demand would still be very strong.

Slowing Chinese Demand

Supply-Side Economics

So that's the demand side. Now let's talk about the supply side for a minute.

Did you see the news earlier this week? Chile-owned miner Codelco announced it has cut almost 3,900 jobs. Codelco's central thesis is that prices will trade in a range of $2 to $2.50 a pound for the next few years. It is slashing its workforce, but says that won't affect production. I'll believe that when I see it.

In August, Freeport-McMoRan (NYSE: FCX; Price: $12.02) said it would slash its mining employees and contractors by 10%. Considering that Freeport is the world's largest publicly traded copper miner, that's big news. Freeport also suspended operations at an Arizona mine and decreased output at two other mines in New Mexico and Chile. That took about 68,038 metric tons per year of copper off the market.

Also in August, Glencore, the world's third-biggest copper miner, decided to suspend production for 18 months at its copper mines in the Democratic Republic of Congo and Zambia. Glencore, which is burdened by debt, says this will take 400,000 metric tons out of the copper market. That's 2% of global supply.

These mine closures, coupled with steadily rising demand, has led the ICSG to predict that mined supplies of copper will fall far short of demand as early as 2017.

The Upcoming Copper Crisis

Copper's in the Bargain Bin

Sure, copper prices could continue lower. But don't you think most of the bad news is priced in? I do.

I'd say that if you think copper prices are cheap, don't get used to it. We're seeing stockpiles in London melt away... we're seeing China's imports rise... and if history is any guide, it's going to buy a heck of a lot more.

Down the Shaft

There are ways to play this. Stocks of select copper miners like Freeport Mc-Moran and Antofagasta (OTC: ANFGY; Price $16.64) look pounded-down-into-the-dirt cheap. Do your own due diligence. It could be a wild ride.


Source: The Non-Dollar Report

[behappyalways]

China's Copper Imports Face Unprecedented Drop on Slowdown
http://www.bloomberg.com/news/articles/ ... n-slowdown

[winston]

Copper prices are down 13% over the past month.

[winston]

CHART: This ‘cheap’ metal could fall another 30% from here

by Jeff Clark

Source: Stansberry Short Report

http://thecrux.com/top-trader-this-chea ... from-here/

[winston]

Copper Advances as Chinese Smelters Propose Cutting Output

by Luzi-Ann Javier

Metal producers said to mull reduction of 200,000 metric tons

Prices still head for biggest monthly decline since January

Source: Bloomberg

http://www.bloomberg.com/news/articles/ ... s-in-china

[winston]

Why Copper Won’t Fly

By Shuli Ren

Source: Barron's Asia

http://blogs.barrons.com/asiastocks/201 ... -wont-fly/