The study group has a serious message for copper bulls: Andy Home By Reuters

LONDON (Reuters) – Copper rallied strongly this week as China’s promised stimulus package reignited investor enthusiasm.

Renewed optimism that the world’s biggest buyer can regain lost output momentum pushed the three-month metal on the London Metal Exchange (LME) above $10,000 a metric ton for the first time since July.

The turnaround in macro sentiment was mirrored by a positive shift in market sentiment as Shanghai copper stocks trended sharply lower in recent weeks.

However, the copper bulls may move ahead of them.

There is no shortage of copper, according to the International Copper Study Group (ICSG), which has just updated its supply and demand forecasts for this year and next.

Indeed, the ICSG expects a large global supply surplus of 469,000 tonnes this year, followed by another surplus of 194,000 tonnes in 2025. The extent of the oversupply is more than double that estimated at the Group’s last meeting in April.

SUPPLY DECREASES PERFORMANCE

ICSG’s forecasts come with statistical caveats, especially since the Group’s calculation of apparent demand in China is based only on reported data such as inventory levels and trade flows.

The methodology cannot capture changes in strategic or commercial stocks that can be extremely important in determining the actual market balance.

But the Group’s increased surplus forecasts for 2024 and 2025 are almost entirely due to changes on the supply side, the much more transparent side of the equation.

Estimated copper mine output growth of 1.7% in 2024 will be slightly down from last year, but a significant improvement from the 0.5% forecast in April.

ICSG expects the growth rate to accelerate to 3.5% next year as large mines such as Congo’s Kamoa-Kakula and Mongolia’s Oyu Tolgoi increase capacity and Russia’s new Malmyzhskoye mine comes into production.

Refined metals production is now expected to rise 4.2% this year, a further update from April, when the ICSG forecast a 2.8% increase.

THE MARKET OF TIGHT CONCENTRATIONS

The mismatch between the growth rate of mine and smelter production is squeezing the raw materials segment of the copper market.

On-site treatment fees charged by smelters for converting mined concentrates into refined metal are close to zero.

Tightening smelter profitability has fueled a bull narrative about the copper shortage, but that misses the point that low treatment rates also reflect an aggressive expansion of copper smelting capacity, particularly in China.

Chinese smelters announced plans to cut operating rates in March, but the effect was to slow rather than reverse output growth. Domestic production of the refined metal further increased by 6.2% year-on-year in the first eight months of 2024.

The country’s top manufacturers are again calling for collective restraint. Whether this has any tangible impact on actual production levels remains to be seen.

SURPLUS METAL

While there is a real tightness in the raw material supply chain, there is clearly no shortage of copper.

Global stockpiles hit a four-year high of 599,000 tonnes at the end of August. Even after falling 100,000 tonnes so far this month, they are still 284,000 tonnes higher than at the start of 2024.

The global surplus was masked by regional rigidity.

Low inventories and a sharp tightening of the CME contract in May reflected the US exchange’s limited physical delivery options rather than the global shortage.

CME stocks are now rising rapidly, but only after a complicated physical arbitrage that saw Chinese smelters deliver metal to LME warehouses, as neither has a direct CME delivery option.

China exported 332,000 tonnes of refined copper between May and August, which is why stocks in Shanghai are now falling.

BULL’S HOPE OPPOSES REQUEST

This week’s price rally targeted China and renewed optimism around the outlook for copper demand.

The ICSG has not changed its views on this since April, forecasting that China’s copper use will grow by a relatively modest 2.0% this year and 1.8% in 2025.

The group expects the rest of the world to fare better after a 3.0% contraction in demand last year.

But global demand growth of 2.2% this year will lag refined output growth by a significant margin, hence the expected metal glut.

It is notable that the rise in the LME copper spot price was not matched by any movement in forward spreads.

The three-month LME cash time spread continues to trade in broad contango. The cash discount was valued at $131 at Thursday’s close, a strong price signal that the world is not yet running out of copper.

Funds ignored similar market dynamics when they climbed into the copper market in the second quarter. They took off again in the third quarter as rising Chinese exports and rising inventories dispelled any illusion of a shortage.

They risk repeating the same mistake in the current rally.

The opinions expressed here are those of the author, columnist at Reuters