Mumbai, 22 December, 2016 (GPN) .
Author: Mr. Alireza Moghaddam, Chairman, AMIDT Group : In today’s world China plays a very major role in determining the prices of metals, as it is the largest consumer of most of the metals. A slowdown in Chinese economy has not only led to a slump in the metal prices but also impacted the growth projections of countries which are large metal exporters like Australia, Chile and many others.
Metals have their own fundamental to consider including the wider geo-political issues and many other con-currents impacting the markets. These include the uncertainty about the Chinese economy, fallout from the Brexit, banks strategies if negative interest rates do not provide the required boost and how markets will react as the new US president takes over. In spite of all these uncertainties metals are choosing to ignore a great deal of it.
As metal prices have started to rally, having fallen a long way in recent years, there is still a considerable room for them to recover. Out of all the base metals perhaps copper is the more reflective of the global economic situation than the other metals. The downward trend in the copper prices has halted as of now. Copper has been in a bearish market for the past five years, but it’s ready to get out of the cave. It’s on the verge of heating up.
According to International Copper Study Group (ICSG), the market will be very close to a supply-demand balance in 2016 and 2017, and China is expected to be the biggest contributor to that supply and demand growth. Demand will increase 1.8% in 2017. If the Chinese economy proves stronger in 2017 than the market currently thinks the commodity market would get a significant boost. The Chinese authorities seem to be managing the transition of the economy from industrial based and export led to a more consumer and services oriented economy. Even a growth rate of 6% means a lot of demand as it is a massive economy.
Moreover, low copper prices, relatively low stocks and a destocked market suggest that the downslide is likely to be limited. With miners struggling with low prices, the effects of reduced capital spending are likely to catch up with the industry and we could expect more supply disruptions. A pickup in demand in China would catapult the prices skywards.
Added to this is the Chinese government’s crackdown on shadow lending which would see copper from non bonded warehouses hitting the market and flooding it in the short term. Essentially in “Shadow Lending” Chinese were buying copper and keeping it in non-bonded warehouses, then using it as collateral to get low-cost loans to slip into higher-yielding investment vehicles. However, it became pretty apparent that there was some fraudulent activity going on — basically they were using the same block of physical copper as collateral on multiple loans.
The World Bank (WB) projects that copper prices will start rising in 2017, reaching USD 4,866, and moving to USD 5,092 in 2018 and USD 5,329 in 2019. As we end 2016 and move into 2017, 2018 there are some indications that we could start to see the market slip from surplus into deficit on the supply side. That’s going to obviously support copper prices higher.
The shift in demand and supply would be due to a couple big things in the background driving the longer-term outlook. In the last few years we’ve seen a lot of major miners with the big, big projects, really shift focus to cost cutting at their existing operations as opposed to sinking capital into new development operations. That’s great for the bottom line today, but in terms of future supply, it definitely sets them back. These are copper projects that still need to come online at some point and, if anything, they’ve all been delayed by a year or two — if not more — going forward. It’s like a self-fulfilling prophecy for the majors, because obviously cutting costs today increases their bottom line in the short term, and the effect of that is to drive up copper prices in the future because there just isn’t as much physical copper available.
Along with China, Japan, India, South Korea and Germany are other largest importers of copper. The Indian economy has the highest growth rate of 7% in the world and this is expected to cross 8% in the near future. All developmental and infrastructure projects, industrial production of cars, electronics, IT, Telecom and other sectors would see a rise in demand for copper. Along with China, India would play a major role in shoring up the demand for copper in the coming years.
Copper is a precious metal unlike silver and gold. It’s the most versatile metal that exists today. It’s a very efficient conductor of electricity, and it’s used for heating, plumbing, roofing, computers, cars, mobile phones, air conditioning, adapters, wiring, electrical leads, motors and lighting units, transformers etc. It’s used almost everywhere and has been a part of the development of humankind for thousands of years. It has such a high commercial and industrial importance that you’ll never see its price fall to zero.
It’s no secret that we’re starting to rely on alternative ways to provide a cleaner world, and copper will play a huge role in the advancement of technology and our society.
Just take a look at electrical vehicles the future of the Auto Industry, according to Bloomberg, these vehicles will hit 41 million in sales by 2040.And you might be wondering, what does this have to do with copper? Well, it takes three times the amount of copper to build these vehicles as it does gas-powered vehicles. Automakers will need at least three times more copper than ever before. Demand will be high. And it’ll get even higher.
This is exactly what the copper market needs to get out of the slump it’s been in for the past few years. A higher demand will create an upturn in the market and increase prices in the coming years.
Author: Mr. Alireza Moghaddam, Chairman, AMIDT Group