Winter Park, Florida 08/01/2016 - Copper faces major challenges this year but the fundamental situation might not be entirely dire because China has amped up its sector specific stimulus while another round of price-related mining cuts is likely, Bank of America Merrill Lynch (BoA ML) said.
On the supply side, an accelerated closure of inefficient, loss-making and marginal mines is having an impact on metal supply/demand dynamics. In 2015, mine disruptions exceeded six percent - that was the highest level since 2011, the bank said in a note on Friday.
"The curtailments have already had an impact on spot treatment and refining (TC/RC) charges, which started rolling over towards the end of 2015," said BoA ML, which noted that the first settlement of 2016 annual contracts between Antofagasta and Jiangxi Copper was struck at $97.35 per tonne/9.735 cents per pound, down from last year's $107.5/10.7 cents.
And according to FastMarkets' data, spot copper TC/RCs this week fell to a four-month low of $89-99/8.9-9.9 cents.
"The decline in treatment and refining charges is one of the clearest signs that the copper market is rebalancing. Given our expectations that prices have not yet hit bottom, we believe further curtailments will come through near-term," BoA ML said.
"In fact, if miners removed another 500,000 tonnes of supply, copper would flip into a meaningful deficit," it added.
On the demand side, the fact that global consumption rose by a "dreadful" 1.5 percent year-on-year in 2015 has caught the attention of Chinese authorities.
"China's government has become more aggressive in supporting the economy with some old-fashioned stimulus. Testament to that, several industries, including autos are now rebounding; grid spending has also added to copper demand, despite substitution threats," BoA ML said.
"Pockets of strength make China's copper off-take less bad but these patches are not sufficient to make the country look good yet," it added.
Additionally, China's previous growth model is broken and the transition towards a new economic policy remains bumpy. Many of the measures targeted at the auto and construction industry can only help growth temporarily. In the longer term, these initiatives will run out of steam, the report said.
"Capital flight, the equity market and debt levels all remain worrisome and should prevent a sharp acceleration of activity. Yet, if the government manages to prevent imbalances from spiralling out of control completely and provided the stabilisation in some copper intensive sectors continues, we believe China may be less of a headwind in 2016 than currently appears," it added.
(Editing by Mark Shaw)