Commodities Comment:Trouble down pit,Copper mines begin to struggle
Amid the swirl of recent price shocks, which have taken copper to six-yearlows of below $5,200/t, the focus has chiefly (and not inappropriately) been ondemand and the conditions of the Chinese economy. However, China’s equitymarket convulsions aside, news on the fundamentals side for copper hasbeen mostly more supportive. While last week’s July China flash PMI readingwas weak, June trade data showed imports of concentrate posted anotherstrong uptick, maintaining an 11% YTD growth figure, while cathodes wererelatively flat YoY. Meanwhile, as 2Q production reports begin to come inrevealing a few downgrades and as a raft of disruption stories from Chile,China, Zambia and PNG begin to filter through, the mining side of theequation has begun to look shakier. We reiterate our view that a significantproportion of copper mine output is struggling at these price levels.
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Thomson Reuters GFMS, the research group, released their estimates of 2Q2015 gold S&D, and forecasts for the rest of the year. Physical gold demandwas the weakest seen since 2009, down 14% YoY, which is a very negativedevelopment given the low price (though note the recent price plunge cameafter the end of 2Q). That said, of the reduction of 142t YoY in physicaldemand, 73t can be attributed to lower central bank demand, which is notprice sensitive (note this demand is likely to be revised higher given a heftypurchase by the Central Bank of Russia in June, post the report’s publishingdeadline). The rest of the shortfall was due to falling jewellery demand (down6% YoY) and retail investment (down 12%), in both cases led by China. Onthe supply side mine production is estimated as up 1.8% YoY in 2Q, with fullyear output expected to rise by 1% YoY. Scrap supply rose for the first timesince 2012, but only due to Turkey, where local prices have risen sharply.
GFMS forecast an end year price near $1,200/oz, with an average of$1,250/oz expected in 2016. We recently downgraded our price forecast in“Gold: Desired neither as a currency or commodity”.
Aluminium production is finally beginning to react to lower prices, withChina’s Xinheng Group closing a 500ktpa smelter in Qinghai province, thoughin recent months this facility had only been running at ~150ktpa. Meanwhile,SMM has reported that up to 620ktpa of output will be cut from three smeltersowned by State Power Investment Corporation in Ningxia, Qinghai andChongqing
