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- The latest Editorial from Peter Hollands, Paul Dewison and Christopher Welch:
- May 9th 2008 - very low level of global mine production over the past four months. Causes have been diverse: low production phases in mine sequencing (over different time frames) at the Grasberg complex, Batu Hijau, Codelco Norte, Highland Valley and Bingham; new strikes at Codelco and the continuing strike at Cananea; weather-related problems in China and Australia; also electric power shortages in Chile and on the African Copperbelt.
The impact of low mine production has been felt first in spot treatment and refining charges (TC/RCs) for custom concentrates. Smelters’ spot buying terms, with an early quotational period (QP), have fallen to just $15-20/dmt and 1.5-2 c/lb in India and around $30/dmt and 3 c/lb in China. Traders have been buying from mines on late QP and with TC/RCs said to have been zero in at least one instance. - Consumption Trends
- In the early part of this year, the Chinese engine of consumption growth appears to have faltered. Weaker than expected demand from the power sector is weighing down on domestic copper prices, which in turn is making imports of refined copper unattractive, according to Jing Chuan of Great Wall Futures. He went on to say that around 30% of China’s wirerod and wire capacity is currently idle. Part of the reason for the slowdown is not the lack of final demand, but the growing unwillingness of fabricators to hold on to inventory in the current copper price environment. Imports of refined copper into China have been falling through the early part of this year, to 100,000 tonnes in April, largely offsetting gains in domestic output. This does give us some concerns about prospects for Chinese consumption in 2008, but we hold our forecasts at 12.2% growth, as we see the current slowdown as being primarily an inventory effect. Exports of products remain buoyant, figures for January-February showing plus 20% growth, while imports remain flat.
- Mine Supply and Stock Trends
- Codelco lost 19 kt of production and US$100 million due to a three week sub-contracted worker strike that ended on May 5th with Codelco paying each worker a Peso 500,000 ($1,073) bonus. However, as a group the subcontracted workers have become more aggressive and the significant wage gap between directly and indirectly employed workers remains, so there is a strong possibility of further strike action. To try to end the 9 month strike at its Cananea mine, Grupo Mexico may offer each worker a severance package and then temporarily close the mine. The company would then re-hire a less militant work force. However, the recent re-election of the leader of the main union involved in the strike may prolong the dispute.
- Price Trends
- Spot copper maintained its $8,400-8,800 plateau during April, supported both by supply disruption news, the latest being the Codelco strike, and also by a negative medium-term supply view - choose your story: falling grades at old mines, Chilean power supply problems, African power and infrastructure problems, lack of mining equipment, or the possible closure of Cananea. Spot copper dramatically dropped at the start of May when the Codelco strike drew to a close, recovering slightly during the first week only to be knocked back down by an 11 kt stock build on the LME on May 9th.
- Macroeconomic News
- What type of economic recovery will the OECD have?
That is now the main question for commodities in general, especially copper. Stocks are likely to remain low and the next generation of big projects is not coming on as quickly as expected so any kind of recovery, that’s U, V or W, will keep copper stocks at today’s low levels for some time to come. - The Federal Reserve has cut the base rate aggressively, again, and looks like it will continue to do so. Sales of durable goods fell by 2.8% in February, an unexpected drop caused by a 31% drop in sales of semi-conductors. Demand for machinery also dropped, down a significant 13% in February, the lowest since records of demand began in 1992.
- Smelting, Refining and Scrap
- Spot processing charges for clean custom concentrates have continued to fall, due to the gradual impact of very disappointing mine production levels that set in from January. Combined with a high level of smelter overcapacity, this has brought smelter buying terms down to a treatment charge (TC) of $15-20 per dry metric tonne (dmt) and a refining charge (RC) of 1.5-2 c/lb for early quotational period (QP) at Indian smelters and around $30/dmt and 3 c/lb in China. However, such low terms are not as damaging for smelters as they might seem at first glance, since by-product credits from sulphuric acid have soared along with the latter’s spot price.
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