According to statistics from Changjiang Securities, 2016–2017 will mark the peak period for global copper concentrate supply. The supply of copper concentrates (containing copper content) is expected to reach 19.598 million tons and 20.691 million tons in the current and next year, respectively, with growth rates of 5% and 5.6%, respectively. From 2016 to 2017, copper prices will face significant downward pressure from the supply side, putting them at risk of falling.

According to statistics, in 2016, the primary source of increased copper supply from major global producing regions was Peru (1 million tons). Among them, Freeport’s Cerro Verde expansion project (an increase of 200,000 tons), the Zafranal project—a joint venture between Teck Resources and AQM (an increase of 500,000 tons), and the Las Bambas project undertaken by China Minmetals Corporation (an increase of 270,000 tons) will be the main contributors to Peru’s increased supply. In 2015, Peru’s copper production stood at 1.705 million tons; therefore, based on this trend, Peru’s supply growth rate in 2016 should theoretically exceed 50%.

According to global copper production data for January released by the World Bureau of Metal Statistics (WBMS), global refined copper production in January reached approximately 1.689 million tons, representing a 5% increase year-on-year. However, when examined in greater detail, Asia’s output far exceeded expectations, with the primary contribution coming from Kazakhstan’s Bozshakol project, which significantly surpassed initial projections. The project was initially expected to reach an annual capacity of 100,000 tons in 2016; based on January’s actual production figures, its annualized capacity has now climbed to 300,000 tons. In Peru, production capacity is still in the ramp-up phase and has not yet fully reached its theoretical potential. The decline in Chile’s output compared to the previous year was mainly due to reduced production by some smelters triggered by low copper prices, as well as the high base effect resulting from record-high copper production in January 2015. In Africa, the reduction in output was largely attributable to Glencore’s decision last September to temporarily suspend operations at its Mopani mine in Zambia and its Katanga project in the Democratic Republic of the Congo, collectively accounting for 400,000 tons of capacity.

Considering that the production capacity of newly commissioned mines has not yet reached full operational levels and there is still room for future capacity expansion, and given that the primary factor behind Chile’s production cuts in January was price—currently, copper prices have rebounded from January’s $4,300 per ton to around $4,750 per ton—some production capacity may already have been resumed. In the author’s view, there is further potential for copper mine output to increase in the future.

The launch of the new project has lowered the cost curve for copper mining.

Driven by the addition of new supply in 2016, the cost curve for copper supply will shift downward, and the support that copper concentrate production costs provide to copper prices will become relatively weaker.

Although the grade of new projects has been declining year by year, we believe that four factors have significantly reduced the current cost of copper mining. First, the economies of scale associated with copper mining projects; second, the low-interest-rate environment for U.S. dollar-denominated debt during the investment period from 2012 to 2013 (copper mining investments typically span a long period, usually five years); third, the weakening of currencies in resource-rich countries such as Chile and Peru; and fourth, the sharp drop in crude oil prices.

According to the capacity costs disclosed for projects commissioned between 2016 and 2017, the production costs (cash costs plus capital expenditures) of the vast majority of new capacities are below the current price of USD 4,750 per ton. Typically, capital expenditures account for 20% to 25% of the cash costs for copper mines; thus, the cash costs of most newly added capacities are below USD 4,000 per ton. Among these, large-scale projects with annual capacities exceeding 250,000 tons—such as Las Bambas, Zafranal, and Totten—have cash costs all below USD 3,500 per ton.

The probability of copper companies cutting production is low.

By analyzing a sample of financial data from 30 major copper companies worldwide, we found that in 2015, these 30 companies collectively produced more than 70% of the global copper concentrate output—exceeding China’s total supply. As the data clearly show, nearly all financial indicators deteriorated after the third quarter of 2015. In my view, under conditions of financial strain, mining companies’ strategy of prioritizing cash flow may prevent production cuts as long as mineral revenues remain above cash costs.

In fact, judging from the production guidance currently released by global copper giants, with the exception of Codelco, Glencore, and AngloAmerican—which have plans to cut production—in 2016, all other major players will bring their newly commissioned capacity online as scheduled. In reality, the copper giants have already fallen into a “prisoner’s dilemma”: if they cut production, they’ll end up merely helping others boost their own output. Therefore, unless copper prices have severely eroded mine cash flows, large mining companies won’t readily reduce production.

Copper inventory buildup in the bonded zone

There is still pressure from the future release of supply.

1 As of February, total imports of unwrought copper amounted to 781,000 tons. During the same period, LME inventories fell from 237,000 tons to 197,000 tons, while SHFE copper inventories rose from 189,000 tons to 305,000 tons. In March, LME inventories further declined to a historic low of just 140,000 tons, whereas SHFE inventories increased from 300,000 tons to nearly 400,000 tons—their highest level on record.

The author believes that the substantial increase in copper inventories at the Shanghai Futures Exchange in February represents a delayed response to the opening of arbitrage windows for imported copper in January (with transportation times ranging from 15 to 30 days). Since arbitrage opportunities for imported copper remained profitable throughout January and February, this has helped sustain the premium for spot copper in the Yangshan Port bonded zone (as import arbitrage can be directly cleared and imported through Yangshan Port).

Since customs statistics include spot copper entering bonded zones as imports, a significant portion of the 780,000 tons of copper imported from January to February remains in bonded zones. As the arbitrage window closes, the continuously declining premium for spot copper in the Yangshan Port bonded zone indicates that large quantities of spot copper are piling up in the Yangshan Port bonded zone. Once the arbitrage window reopens, this spot copper in bonded zones could enter the domestic market at any time. We expect that inventories at the Shanghai Futures Exchange will continue to rise in the near term, and copper prices still face downside risks in the short term.