In this series, we’ve discussed that according to the ICSG (International Copper Study Group) global copper demand contracted 3% YoY (year-over-year) in the first three months of the current year. However, refined copper production rose 5% over this period—led by a 9% rise in China’s copper production. The demand and supply mismatch has widened the surplus in the copper markets. “Surplus” is defined as production in excess of demand.
Copper surplus widens
According to the ICSG, in 1Q15, refined copper witnessed a surplus of 136,000 metric tons on a seasonally adjusted basis. Refined copper markets were in a deficit of 268,000 tons—seasonally adjusted—in the same period last year. A surplus in commodity markets puts pressure on prices.
Aluminum has been in a surplus for almost a decade now. The production cuts by aluminum producers like Alcoa (AA) have failed to restore the desired balance because there has been a surge in China’s aluminum production.
A copper surplus is negative for producers like Freeport-McMoRan (FCX) and Southern Copper (SCCO). Currently, Freeport forms 4.2% of the SPDR S&P Metals and Mining ETF (XME) and 3.56% of the Materials Select Sector SPDR ETF (XLB).
However, the global copper refining capacity utilization ratio rose in the first three months of the current year. This can be seen in the previous chart.
The copper surplus adds to existing copper inventories. The ICSG estimates that the copper inventory at major exchanges totaled 497,431 tons at the end of May. Although the inventory levels have come down, compared to April, they’re up 62% since the start of the year. Please note that the copper inventory tends to rise at the start of the year.
Visit Market Realist’s Copper page for recent developments in this industry.