The spot price of copper on the London Metal Exchange is down by 10.4% since the start of 2013, but what is surprising is a recent bounce. August has seen copper rise steadily and gained by 4% since 1 August. Copper prices had fallen along with that of other metals, chiefly because the Chinese economy’s appetite for metals was believed to have diminished, while the US Federal Reserve’s talks of reining in quantitative easing added to the metal’s woes.
While it is unclear if the Fed will start tapering bond purchases from September, China does appear to be staging a comeback. Data show the economy to be stabilizing. The government is believed to be loosening its tight grip on the economy that was partly responsible for the slowdown in the first place. That may explain why metal prices, including that of copper, have risen. A tighter-demand supply situation could make a significant difference, because the market is surplus at the moment.
Rio Tinto Plc’s outlook, issued after declaring its half yearly results in August, said the surplus situation in copper will continue for the next 12 months. It expects new mine supply to come up, while demand may not be strong enough.
Last week, the International Copper Study Group said that after seven months of consecutive surplus, the market for refined metal showed a small deficit of 17,000 tonnes in August. Still, in the January-May period, the refined copper market is staring at a seasonally adjusted surplus of 372,000 tonnes, compared with a deficit of 344,000 tonnes in the same period last year. Global usage of the refined metal fell by 2.1% but, if one excludes China, it has declined by 1.5%.
What does this mean for Indian copper producers? The only domestic fully integrated copper producer is public sector unit Hindustan Copper Ltd. The rising trend in metal prices is positive for the company. The depreciation in the rupee versus the dollar should lead to better realizations. These may be visible with a lag as contracts get re-priced but also depend on its ability to hike output (June quarter had seen a planned shutdown affect volumes).
Hindalco Industries Ltd and Sterlite Industries (India) Ltd run custom smelting operations—buying copper concentrate from miners to process it into refined copper and finished products. Their main earnings are from treatment and refining charges (Tc/Rc) and also price realizations earned by selling by-products.
A global surplus situation is good news for them, as smelters have the upper hand over miners. Sterlite had said that Tc/Rc rates were 12% higher in the June quarter over last year, and flat sequentially. Since these are denominated in dollars, these companies should earn more because of rupee depreciation, too.
It is still early days. Investors should continue to watch on economic data from the US and China to see if early signs of economic recovery get stronger, and also whether the copper market’s surplus narrows. If both parameters point in the right direction, then it may be time to turn optimistic on the outlook for copper companies.
