Chile Quake Shakes Copper Market But Peruvian Production May Create Lasting Changes To Supply Mix
By October 11, 2017– Published in on
About a week ago a 5.4 magnitude earthquake shook the Antofagasta region of Chile, which is home to some of the world's most productive copper mines. The news was probably responsible for the pop in copper's price that we saw last week, but the rise we are seeing in the copper market now looks more durable. There was no damage done to Chilean mines in the recent quake, and all major mining operations seem to be normal in the area.
The drive higher in the copper price this week seems to be a result of far lower amounts of primary supply in the world market, and Chinese demand that just won't quit. Peru has recently overtaken Chile as China's largest supplier of the red metal, and so for this year, Chile's overall shipments of copper concentrates is down at least 7% year to date.
In fact, when we dive deeper into the supply data for copper, we realize that the only thing keeping the price in check is massive scrap supplies from around the world, primarily in the United States. A recent law passed in China may put a curb on the imports of low-grade scrap, so copper traders may be looking to lock in lower prices for physical supplies while they can.
The pace of import growth for mined copper concentrates has fallen to a near zero level in China for the first eight months of 2017, against a robust growth rate of 28% last year. The demand for these concentrates has exploded as China over the last few years, as China has built out significant smelting capacity. Since 2011 imports soared from around 6 million tonnes (bulk weight) to 17 million in 2016.
Clearly the dip in primary supply has been a concern, and the gap has been largely filled with imported scrap. Chinese imports of scrap have risen by 14 percent in the January-August period this year, to an impressive 2.4 million tonnes (bulk weight). During this same timeframe, refined copper from concentrates around the world fell by 1.5%, while scrap contributed 12% more refined copper then the previous year, according to the ICSG.
The availability of scrap on the international market likely has to do with the recent run-up in copper prices, but for the United States at least, there isn't as much scrap hitting the Chinese market. While the US was China's top supplier of scrap as recently as 2015, that is no longer the case. The scrap inventories at the COMEX warehouses are evidence of this, which are currently at the highest levels since 2004.
To make matters more tense for the Chinese copper market, the Congolese recently banned all shipments of unrefined copper and cobalt. This is widely believed to be a strategy by the Government of the Congo to pay off Chinese development loans faster, as the tax revenue from refined materials is much higher.
The Congolese policy also may be designed to spur investment in copper smelting equipment by the Chinese in Congo, though ongoing instability and unreliable electricity may impede development in the medium term. Copper last traded at $3.04usd/lb, up slightly from yesterdays close.