Industrial metals January 2018

Economic & Financial Analysis

Commodities

Industrial metals
17 January 2018
Metals

Copper bulls pricing mine disruptions too early

LME Copper (16/01/18)
US$7,078/t
2018 Copper outlook
LME Copper (US$/t) ING forecasts copper to average US$6,800/t in 2018, up 9.7% on 2017 but
7,400 nonetheless involving a decline from spot levels which may have run ahead of the
7,200
fundamentals. The supply-demand picture looks balanced this year unless one
7,000
6,800 expects a second consecutive year of extremely high disruptions. With the
6,600 market seemingly already pricing this in, the risk it seems is to the downside.
6,400
6,200 The road to US$7,000: Most of the significant price levels breached since the US election
6,000
12 Oct 13 Nov 15 Dec 16 Jan
have seemed to coincide with SHFE traders seizing technical signals. But for all fingers
pointed at speculators the higher price environment has made fundamental sense
Source for all data: Bloomberg
because of the need for an incentive price that can avoid huge supply gaps post 2020.

This said, prices have now comfortably exceeded the trigger to restart investment
decisions. Miners are once again showcasing their project pipeline with approvals and
fundraisings starting to take off. We see the US$6,600-6,700 level as a good floor to
sustain investments with a longer term push above US$7,000 only as significant deficits
take hold.

The balance: The copper market will be balanced this year unless one assumes a second
year of very high disruptions. Whilst the number of labour negotiations at mines will be
above norms we argue it remains prudent to stick to historically tested disruption rates
until proven otherwise (5%, c.1MT). We expect each early resolution to labour
negotiations to pressure prices lower as chances of a significant deficit are reduced.

ING Copper Supply-Demand Estimates (kt)

150

100

50

-6
-50

-100

-150
Refined Balance ('000mt) At higher disruption rate (6%) -142

-200
Hamza Khan 2014 2015 2016 2017E 2018F
Head of Commodities Strategy Source: ICSG, WBMS, Company Reports, ING Estimates
Amsterdam +31 20 563 8958
hamza.khan@ingbank.com
Price forecasts (US$/t)
Warren Patterson
Commodities Strategist 2018 2019 2020
Amsterdam +31 20 563 8921 1QF 2QF 3QF 4QF 1QF 2QF 3QF 4QF 1QF 2QF 3QF 4QF
warren.patterson@ing.nl
Copper 7,000 6,700 6,800 6,700 6,500 6,700 6,800 6,800 6,700 7,200 7,500 7,000
Oliver Nugent
Commodities Strategist Source: Bloomberg, ING estimates
Amsterdam +31 20 563 8892
oliver.nugent@ing.nl

think.ing.com 1
 Industrial metals January 2018

Mine supply to return to growth in 2018

Last year’s 2.7% drop in mine supply made the prospect of depleting copper supply only
too real a possibility. We estimate that the copper concentrate market suffered a 145kt
deficit last year as a result largely of strikes at Escondida and Grasberg. Mine supply will
however return to growth next year as we expect the rebound of these two mammoth
operations to provide over a quarter of the assumed net growth (pre-disruption).

Given the combination of rebounds post disruptions, higher grade sequencing and the
ramp up of a few new operations (such as Cobre Panama, Toquepala expansion, and
Katanga) we expect the copper concentrate market to be balanced in 2018. This is on
the assumption of the historical disruption allowance to mine supply (5%, c.1MT). Each
more aggressive 1% costs an extra 200kt of mine supply and would create a
concentrate deficit that is likely to reduce smelter utilization considerably. We don’t
think such an event is actually as probable as recent sentiment seems to suggest.

Fig 1 Biggest mine supply changes (kt, YoY)

2017E Biggest increase 2017E Biggest decrease 2018F Biggest increase 2018F Biggest decrease

Las Bambas 110 Escondida -109 Escondida 207 Collahuasi -62

Aktogay 70 Batu Hijau -77 KOV/Katanga 150 El Teniente -56
Sentinel 63 Oyu Tolgoi -56 Grasberg 100 Batu Hijau -50
Bozshakol 55 Chino -42 Cobre Panama 100 Candelaria -32
Other Norilsk 38 Alumbrera -40 Toquepala 50 Antamina -30
Spence 34 Morenci -35 Chino 42 Morenci -25
Toromocho 33 Antamina -31 Chita 38 Alumbrera -20

Source: Company data, ING estimates

2018 Copper mine unresolved Strike Risks: how likely is a repeat of 2017 extremes?
labour contracts by month of 2017 was an extremely high year for strikes and resulting copper mine supply
expiry (mostly in H2) disruption. According to ICSG data mine supply utilization averaged 81% last year.
5 Utilization has only ever been as low once in the over 20 years of data. Chiefly
4
responsible was the 44 day strike at the Escondida mine which was Chiles longest strike
in at least a decade. According to Metal Bulletin some 23 unresolved labour contracts
3
remain up for renewal in 2018, which is way above the norms. But how safe is it to
2
assume that resulting disruptions will so hugely exceed the historically tried and tested
1
5%?
0
We would point out several considerations that suggest prudence remains on the side of
being conservative. The massive 2017 disruption to supply was caused by the duration
Source: Metal Bulletin, ING Research and not the number of strikes. Many strikes are actually short enough to be resolved
before even impacting production, such as at Teck’s Quadra Blanca in December.
Looking at the major Escondida contract due for renewal in June we would question the
Negotiations outstanding by
Company appetite for either workers or mining companies to withstand another lengthy strike.
When we further take into account that many of the labour contracts involve the same
Codelco 13
BHP 5
mining companies (13 of the 23 are with Codelco, 5 with BHP) the desire to avoid
Lumina 3 multiple, lengthy industrial action is also intensified.
Freeport 1
Higher prices are certainly likely to embolden workers expectations but so would we
Source: Metal Bulletin
argue will be the miners incentive to avoid production losses. With most contract
negotiations actually due for the second half it is very likely we will see more early
resolutions announced as has already happened for 10 of the originally 33 earmarked
negotiations (including Ventanas, Centinela and Casa Matriz). As news flow sees
potential future disruptions dissipate and the physical indictors (flat premiums, wide
contango etc) do not reflect any refined market tightness, the risk we argue remains on
the downside. The copper bulls appear to be pricing in mine disruptions too early.

2
Industrial metals January 2018

Charts
Fig 2 LMEX index Fig 3 Copper prices
4,000 7,500 60,000

7,000
3,500 55,000
6,500
3,000 50,000
6,000
2,500 45,000
5,500

2,000 5,000 40,000

Jan 17 Apr 17 Jul 17 Oct 17 Jan 18 Jan 17 Apr 17 Jul 17 Oct 17 Jan 18

LMEX Index LME Copper 3M ($/t) SHFE copper 3Month (CNY/t)

Source: Bloomberg Source: Bloomberg

Fig 4 LME copper cash-3M price spread (US$/t) Fig 5 1Yr forward curve: LME Copper (US$/t)
10 7,500
0
7,000
-10
-20
6,500
-30
-40 6,000
-50
-60 5,500
Cash 1M 2M 3M 4M 5M 6M 7M 8M 9M 10M 11M 12M
-70
Jan 17 Apr 17 Jul 17 Oct 17 Jan 18 Day before Two weeks before Month before Year before

Source: Bloomberg Source: Bloomberg

Fig 6 SHFE-LME spread: Copper (US$/t) Fig 7 LME Cu net managed money (000 lots)
400 90
300 80
70
200
60
100 50
0 40
30
-100
20
-200 10
-300 0
Jan 17 Apr 17 Jul 17 Oct 17 Jan 18 Jan 17 Apr 17 Jul 17 Oct 17 Jan 18

Source: Bloomberg Source: Bloomberg

Fig 8 LME copper stocks (000t) Fig 9 SHFE copper stocks (000t)
800 500

400
600
300
400
200
200
100

0 0
Jan Mar Jun Sep Dec Jan Apr Jun Sep Dec
2012-16 2017 2018 2012-16 2017 2018

Source: Bloomberg Source: Bloomberg