Copper: Downward trend likely to continue

By Naveen Mathur

Copper is regarded as an indicator of economic growth since its performance is correlated with global developments. It’s considered one of the most versatile metals and its benefits are both to the industrial space and to the investor’s portfolio.

Copper was the first metal to be mined and its significance has increased with time due to its usage in various sectors. Being an excellent conductor of electricity, it forms an essential component of energy-efficient generators, transformers, motors and renewable energy production systems. The electrical industry is the dominant segment, accounting for about 37% of global copper consumption, followed by building and construction (31%), transportation (11%), consumer and general usage (10%), and industrial equipment (10%).

The world refined copper consumption has increased at a compounded annual growth rate ( CAGR) of 2.3% since 2000 and currently stands at 20.47 million tonne (2012). The rise in consumption is driven by the world’s fastest growing economy, China. The country’s share in world copper consumption increased from 29% in 2008 to over 39% in 2012. On the supply front, Chile, China, Peru, the US, Australia are the major copper producing nations. The copper mine production has increased at a CAGR of 1.84% since 2000 and currently stands at around 16.74 million tonne in 2012. The world refined copper production has increased at a CAGR of 2.4% and was 20.1 million tonne in 2012. The higher growth in the case of the latter is mainly attributed to the mounting production in China, where the refined copper output witnessed a 12.8% CAGR during the same period as a result of increasing capacity.

After being in deficit for three consecutive years in a row, the global copper may witness a surplus in 2013, as per the International Copper Study Group (ICSG). The refined copper production is estimated to increase significantly by around 5% to 21.14 million tonne in 2013, while consumption is expected to grow by 1% to 20.68 million tonne due to the slow economic growth across the world.

On the domestic front, India’s refined copper production has increased at a CAGR of 7.9% since 2000 and stood at 7.05 lakh tonne in 2012. Though the nation is not among the top copper producing countries, when it comes to capacity, in the process of smelting and refining copper, India is among the top five. The domestic consumption of copper has also witnessed a steady growth on account of the rise in infrastructure development as well as growth in the manufacturing sector. As per the EIU report, India’s consumption in 2012 was 3.94 lakh tonne. However, according to ICSG, India’s per capita consumption of copper at 0.5 kg in 2011 was significantly lower than China’s average of 5.8 kg. Hence there is a huge scope for further growth.

In the past few years, copper prices have become very volatile, especially due to the global economic uncertainties. The year 2012 started on a positive note for LME Copper, with prices gaining nearly 11% as the major economic indicators from China and the US showed a stable growth, increasing hopes of revival in demand. Though the prices declined during the second quarter of 2012 owing to the rise in concern over the Eurozone debt crisis and slower growth in China and the US, copper ended on a positive note last year.

In 2013, copper prices have declined by around 5.1% on account of strong supply-side fundamentals. The downward trend is expected to continue due to the declining Chinese imports, coupled with the rising LME and Shanghai inventories. The continuing concerns over Europe’s economic growth and the slowdown in the US economy, along with the surplus situation for 2013, may exert a further downside pressure in copper prices over the medium term. The continuing concern over the global situation and surplus in 2013 will keep the prices in check in the medium term.

(The writer is Associate Director, Commodities & Currencies, Angel Broking)