Commodities | Nov 29 2012
– Copper market outlook updated
– Bauxite availability may impact on Chinese aluminium output
– Asian fuel oil market may be reshaped
– China assessing iron ore tax changes
By Chris Shaw
International Copper Study Group data for January to August this year suggests the global copper market was in deficit by 522,000 tonnes during this period. The deficit for August was around 8,000 tonnes, Macquarie suggesting this is an indication of a finely balanced market.
Chinese apparent demand remains the main driver of the perceived deficit in copper, offsetting further demand weakness from the European region. But Macquarie notes physical premiums in Europe remain elevated and LME stocks are below one week of European consumption, which in the broker's view sets the metal up for decent upside into the first quarter of next year.
On the supply side, Macquarie notes supply growth has been estimated at around 3% in year-on-year terms by the Study Group, which is in line with the broker's forecasts. Weaker prices and sluggish industrial production in developed economies leads Macquarie to suggest the three-year growth streak in scrap copper supply may be broken this year.
JP Morgan's conviction in a tighter global copper market in both 2013 and 2014 has strengthened following September quarter reporting season. Copper mine production continues to struggle to meet plans and slower investment growth stemming from soft demand and price declines through 2012 are likely to add to shortfalls in coming years in the broker's view.
Changes to expectations have JP Morgan forecasting a global copper market deficit of 255kmt this year and a nearly balanced market in 2013. A slight deficit is expected in 2014, while global stocks-to-use coverage for copper is expected to tighten from 6.4 weeks at the end of next year to 5.9 weeks at the end of 2014.
In JP Morgan's view it remains premature to suggest the commodity supercycle has run its course, as mid-cycle softness is being confused with structural decline. As well, the broker suggests there is not yet evidence commodity markets have created sufficient spare capacity to absorb demand growth for the coming generation,
This reflects the fact miners continue to struggle to increase supply, especially given a rising dependence on riskier and more remote geographies to drive needed project growth. In JP Morgan's view, recent project deferrals and cancellations will serve to exacerbate supply/tightness in outer years, when the global economy is not as week as is the case today. Marginal cost economics suggest higher metal prices will be needed.
For copper specifically, JP Morgan suggests operational difficulties at a number of mines previously expected to increase output over the next two years imply further downside risk to supply forecasts, while contract deferrals will lower medium-term supply growth.
Following its review, JP Morgan makes no changes to price forecasts for copper for 2013 and 2014, though price estimates for the final quarter of 2012 have been lowered. For the December quarter the broker now forecasts and average copper price of U$7,915 per tonne, down from US$8,300 per tonne previously.
For 2013 JP Morgan is forecasting an average copper price of US$8,850 per tonne, rising to US$9,700 per tonne in 2014.
Chinese trade data for October showed a 56% fall in bauxite imports from Indonesia in year-on-year terms, though Macquarie notes to date this has had no impact on the pace of aluminium production growth in China.
Monthly alumina production in China is still up strongly in year-on-year terms, though Macquarie notes since July production has declined on a month-on-month basis by an average rate of around 6%. If the fall in bauxite availability does impact alumina output for any prolonged period, Macquarie sees potential for some negative impact on Chinese aluminium production.
Still in Asia, Deutsche Bank notes there has been a sudden drop in fuel oil prices. This is seen as a reflection of expectations for high imports into the region, softer Japanese demand, increasingly efficient fuel use in the shipping industry and prospects for lower Chinese demand.
Deutsche suggests developments in China could reshape the dynamics of the regional fuel oil market, this via the granting of crude oil import quotas to China's independent refineries. These refineries usually run fuel oil as feedstock.
As an example, Deutsche notes ChemChina, China's largest operator of such refineries, is set to be granted approval to import around 200,000 barrels per day of crude oil starting next year. ChemChina's crude oil import quota is equal to 43% of China's year-to-date fuel oil imports, which implies fuel oil import needs could fall below 270,000 barrels per day next year.
ChemChina's current crude oil import quota covers only 40% of its capacity, so there remains potential for the company to receive further quotas. To Deutsche this suggests a potentially weaker fuel oil market going forward.
ChemChina's intention to run its refineries at higher capacity next year will add to refinery balances, while other refineries are also planning capacity expansions that would add to the current surplus. This raises the possibility of some refinery expansion projects being deferred in Deutsche's view.
In iron ore, Commonwealth Bank notes the Chinese government is understood to be considering lowering the effective iron ore tax rate from around 25% currently to between 10-15%. If the tax was cut to 15%, CBA estimates median iron ore costs in China would fall to around US$95 per tonne from this year's level of around US$105 per tonne.
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