With the weakness in the Chinese economy confirmed this month in poor activity surveys for manufacturing and services, as well as a sharp slowing in the pace of exports and importers, the price of copper – a key indicator of China’s economic health – also continues to struggle.
After a small kick up in early- to mid-August, copper resumed the weakness seen in July and June in the closing days of the month and early September.
The price of the metal is down 25% in the past three months with much of the losses linked to the slow evaporation of Chinese economic activity.
The price is back around $US3.50 a pound on Comex after peaking at $US3.71 in the first fortnight of August. That was up from July’s low of $US3.20 a pound. Copper fell a nasty 8% in the final week of August and the first two days of September.
The strength of the US dollar is playing a big part in the weakness – the dollar index is up 3.8% in the past month but more than 7.6% in the last three months.
On top of the strong dollar, fears of a slowdown in demand are widespread, and not helped by China’s drought and continuing outbreaks of Covid which has now seen the Sichuan capital of Chengdu shut down indefinitely until later this week while movement across much of Shenzhen has been halted or restricted.
Chengdu, a city of 21 million is already sweltering in a record head wave, drought and power shortages, not to mention widespread water rationing, though there have been reports of heavy showers and rain in central China last week.
Chinese domestic demand is weak – manufacturing activity is contracting, according to start of the month surveys of that sector of the economy.
Despite all the problems in China, it has kept up imports of the key metal for most of this year.
This week’s release of August import data showed China imported 26% more copper in August than a year earlier.
Unwrought copper and copper product imports into China – including anode, refined, alloy and semi-finished copper products – totalled 498,188 tonnes in August. That compared with the year-earlier volume of 394,01 tonnes, which was a two-year low.
August’s copper imports were up 7.4% from the July’s 463,693 tonnes.
Imports of unwrought copper and copper products in the first eight months totalled 3.90 million tonnes, up 8.1% from the same period last year.
And this consistent demand has happened in a market where the metal price has slid sharply since the post Ukraine invasion peak – prices are down 31% since the peak of $US4.93 in early March.
Copper supplies are proving problematic at the moment – according to the International Copper Study Group’s (ICSG) most recent monthly report, the copper deficit increased from 34,000 to 64,000 tonnes between May and June and to around 72% at the end of June.
The ICSG said global copper production in the six months to June grew by around 3.2%, while usage rose by around 2.7%, boosted by an export tax on Russian exports and by a pick-up in Chinese imports and stocks.
The average LME cash price for July was $US$7,529.76 a tonne, down 16.6% from the June average of $US9,033.13 a tonne. The 2022 high and low copper prices through the end of June were $US10,730 a tonne in March 7 and $US7,000 a tonne on July 15, respectively, and the year average was $US9,435.39 a tonne and 1.3% above the 2021 average.
Output in Chile continues to slide and July saw another fall, according to government data.
Copper production from state-owned giant Codelco fell 6.5% in July to 128,000 tonnes.
Production at Collahuasi, a joint venture of Anglo American and Glencore dropped 12.4% on a year-on-year basis to 47,300 tonnes.
And copper output from Escondida – the world’s biggest mine and controlled by BHP – dipped 1.8% to 81,400 tonnes.
In late August, Codelco, the world’s largest copper producer, cut its production outlook for 2022, blaming lower recovery levels at some of its mines and ore grades at its huge and ageing Chuquicamata mine as it also deals with fatal accidents which have stopped some construction works.
The Chilean state-owned miner said it now expects output to reach between 1.49 million and 1.51 million tonnes this year, down from a previous forecast of 1.61 million tonnes.
The guidance cut was disclosed in a letter to Chile’s regulator late last week in which Codelco mentioned the redesign it was forced to implement at its Division Ministro Hales mine after a landslide late last year, lowering recovery levels at the site.
It also said geomechanical reasons and material handling system issues affected the century-old Chuquicamata mine.
“All efforts will continue to be made so we can achieve the highest possible level of production by the end of the year,” new CEO Andre Sougarret said in a statement last week.
Codelco has also faced fatal incidents recently.
In mid-July, the company stopped all the works after the death of an operator in the Rajo Inca expansion and later another at its Chuqui Subterranea project, an expansion of the ageing Chuquicamata mine.
In June, the firm’s chairman Maximo Pacheco had told Reuters the annual production goal would be maintained at 1.7 million tonnes while he was in charge, including for this year.
That won’t happen now.
Chile produced 5.73 million tonnes of copper in Covid-hit 2020, and 5.62 million tonnes last year (a five year low). Lower copper grades in mined ore, and drought and Covid are the main factors behind this decline.
Chile has been losing efficiency since the turn of the millennium, as a result of a depletion of reserves, lower recovery rates and overall cost inflation, especially in labour and services. According to local copper commission Cochilco average copper mining grades were 1.41% in 1999 but were now around 0.60%. Costs are up around 30% in the past five years.
OZ Minerals’ cut to its 2022 guidance because of rain, floods and machinery problems in the first half will continue and have exposed the company to an attempted bid from BHP which has a way to go.
BHP and Rio Tinto have maintained their output forecasts for the coming year.
In its 2022 annual report, BHP was modestly confident about copper’s outlook.
“Copper prices spent much of the 2022 financial year trading around historic highs, buoyed by robust demand, low visible inventories, project delays and Russian supply risks,” BHP said.
However, prices fell in two stages in the June quarter. The first decline was due to the demand impact of China’s COVID-19 lockdowns. The second was due to recession speculation in advanced economies.
“We believe mine supply and scrap collection will grow in the next few years, covering near-term demand growth.
“Longer term, traditional end-use demand is expected to be solid, while the electrification mega-trend offers attractive upside,” BHP said.
