Material Matters: Copper, Crude And Mineral Sands

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– Copper concentrate supply to rise
– Oil price forecasts uncertain
– Zircon prices lower for longer
– Ferrochrome prices to rise

By Andrew Nelson

Life’s been pretty good for copper producers of late, comparatively speaking that is. However, the latest data from ANZ brings with it a little bit of bad news for the copper crowd. The bank’s Senior Commodity Strategist, Nick Trevethan, predicts treatment and refinery charges will rise 20% in 2013, while also expecting an increase in global mine supply that will move the market from a 113,000 tonne supply deficit in 2012 to a 200,000 tonne surplus in 2013.

The rationale behind the Trevethan’s postulated 20% refinery charge rise is the bank expects a 7% rise in copper concentrate supply next year, which it believes will give Chinese smelters the upper hand in annual negotiations. ANZ expects 2013 annual treatment and refining charges to rise to US$77.00 a tonne to smelt copper concentrate into anode and a further 7.7 cents/lb to convert said anode into refined copper cathode. The costs miners paid over 2012 were US$63.50 and US$6.35.

Trevethan notes that discussions have already begun in China, with smelters and miners further apart than normal. This leads him to expect fairly protracted negotiations.

The bank expects mine supply will increase to around 19m tonnes in 2013, up from 17.9m tonnes in 2012. A big lift from Escondida will see Chile’s output rise 13%, although disruptions at many of the country’s bigger mines is possible. Peru is also expected to significantly lift output, as are China, Mongolia and Indonesia. Another bump is expected from Zambia and the Democratic Republic of Congo, but given no one’s even willing to bet they’ll be countries next year, ANZ has those number written down in pencil.

And with the production outlook pointing towards increases in the years ahead, the bank doesn’t see any sort of pullback in refining charges. In fact, Trevethan predicts they’ll remain high or trend up at least through to the middle of the decade, with global copper concentrate supply likely to remain in surplus for the next 2-3 years.

With oil prices remaining fairly stable over the past couple of years, forecasting oil prices has been a bit easier than normal. However, analysts from Deutsche Bank note that crude price forecasts for next year are all over the shop, with around a US$50 spread between the top (US$130) and bottom (US$80) of the forecast range. Another word for this would be uncertainty.

Much of this uncertainty arises from a big spread in forecast US oil supply growth, which exceeded forecasts this year. Deutsche expects there’s a good chance we’ll see a repeat in the year ahead. US shale oil projections lie at the heart of the differing views and a wide range for US oil supply projections adds a new element of risk for the market, as the impact of US shale forecasts on the oil balance is significant.

On the other hand, the broker notes there is almost near consensus that oil price collapse next year is very unlikely. The broker also points out the analyst community has consistently underestimated the oil price by around 27% over the past 14 years, thus history suggests it wouldn’t be a prudent move to bet against further resilience in the oil price, especially given Deutsche predicts growth will accelerate to 3.1% next year. Supporting factors are the weak US dollar, recent S&P500 rallies and the fact OPEC spare capacity remains low.

Switching to mineral sands zircon and titanium dioxide (Ti02), analysts at UBS expect prices will remain weak for at the least the near term given weaker demand and a continued run of de-stocking all along the production chain. Add to that an expectation for lower pigment prices and higher ore costs, and margins for TiO2 producers aren’t looking that good in forecasts.

Zircon prices are looking no better, with the broker noting a recent auction by Rio Tinto ((RIO)) attracted some fairly low prices. Demand for both is expected to improve, along with prices, but consensus doesn’t have this happening until 2Q13 at the earliest out to sometime in 2014. 

Lastly, there is a bit of near term good news for ferrochrome producers, with Macquarie expecting global output to pullback by around 4% on production cuts from South Africa. It takes quite a bit of electricity to produce ferrochrome and electricity is something in short supply in South Africa. This has lead Eskom, South Africa’s main electricity utility, to offer to take stock at a profit if suppliers curtail production. The broker notes production has already started to slow in response.

Macquarie sees this effectively tightening the balance in a market where stocks are already considered to be low. Thus, the broker expects we’ll start to see continued upward momentum in spot prices and a possible increase in benchmark prices for 1Q 2013, especially given average spot prices tend to rise in the first quarter of the year over the fourth quarter of the previous year.
 

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