Copper Study Group expects big supply surplus in 2024

The Group still thinks the market will be in deficit this year but April’s 114,000-metric ton forecast has been cut to just 27,000 metric tons, which is a marginal number in a 26-million metric ton global market.

The Group’s statisticians stress that these forecasts are snapshots in time and note “that actual market balance outcomes have on recent occasions deviated from ICSG market balance forecasts due to unforeseen developments”.

The trends behind the headlines are perhaps more significant and the two stand-outs from the latest numbers are the weakness of Western demand and the strength of Chinese production.

Western slump, Chinese (apparent) boom

When the ICSG last met in April, it expected demand outside of China to rise by 1.6% this year after anaemic growth of just 0.4% in 2022.

Fast forward six months and the prognosis is much gloomier. Copper usage outside of China is now expected to contract by 1.0% from last year’s level, “mainly impacted by declines in refined usage in EU countries and North America,” the ICSG said.

But Western demand weakness is being more than matched by strength in China, where apparent usage is forecast to grow by 4.3% this year.

Emphasis on the word “apparent”, since the ICSG uses only reported data such as domestic production, net trade and changes in visible stocks to come up with an estimate of what’s going on in China.

However, its assessment chimes with a copper market consensus that Chinese demand has surprised to the upside this year. Copper’s usage in green transition sectors such as power and electric vehicles seems to have cushioned the metal from a broader manufacturing downturn over the last six months.

With the latest purchasing managers indices signalling a pick-up in factory activity, China will continue to be the core driver of global copper demand as high interest rates take their toll on manufacturing activity both in Europe and the United States.

The “global economic outlook is challenging”, the ICSG concedes but it remains optimistic for next year. It has trimmed only very slightly its 2024 global usage growth forecast from 2.8% to 2.7%.

“An expected improvement in manufacturing activity, the ongoing energy transition and the development of new (semi-manufactured product) capacity in various countries should support higher growth in world refined usage in 2024”, it said.

Surge in refined production

Next year’s expected growth in usage is still going to be exceeded by a projected 4.6% jump in global refined copper production.

Indeed, the production surge has already started. The ICSG has revised upwards its 2023 refined output growth forecast to 3.8% from the 2.6% it expected in April.

As with demand, rising metal production is down to China, which continues to expand its smelting and refining capacity.

Operating constraints and smelter maintenance outages in Chile, Indonesia, Sweden and the United States will cap copper production outside of China this year.

But China’s smelters are aggressively ramping up production. National output rose by 11.5% year-on-year in the first eight months of 2023, according to local data provider Shanghai Metal Market.

Next year will bring more of the same with extra impetus coming in the form of new smelters and capacity expansions in Indonesia, India and the United States.

The ICSG also expects the amount of copper produced from recyclable materials to increase both this year and next thanks to investment in new secondary smelters and refineries.

Under pressure

The size of ICSG’s expected supply surplus next year has surprised the market. But then so too has its assessment that supply and demand will be broadly balanced this year.

Most analysts are anticipating a surplus over both 2023 and 2024. It’s worth noting that the ICSG’s most recent monthly bulletin suggests the global copper market notched up a hefty 215,000-metric ton production surplus in the first seven months of 2023.

If Western demand remains weak through the end of the year, it’s unclear how the production overhang in the first part of the year will disappear to generate the Group’s expected small deficit across the full year.

But while the timing may be debatable, the ICSG’s update adds to a growing consensus that the copper market is heading into a period of fast-rising production and uncertain demand in the world outside of China.

It’s that bearish combination that is pressuring the copper price , which has this week broken down through the $8,000-per metric ton level for the first time since May, last trading at $7,940.

Everyone’s agreed that copper has a bright future in the energy transition, but right now it’s the immediate balance between supply and demand that is weighing on the market.

(The opinions expressed here are those of the author, Andy Home, a columnist for Reuters.)

(Editing by Susan Fenton)