LONDON – A slide in copper demand as much of the world's manufacturing sector is disrupted by the coronavirus outbreak is expected to fuel a surplus this year of up to a million tonnes in what was expected to be a balanced market.
Most analysts are still revising estimates but they say the loss of consumption will be greater than the decline in supply due to closures of loss-making mines or those that have workers affected by the virus.
"The concern is that orders are getting cancelled, there's a lack of new business and if automakers are shutting plants then eventually that's going to filter back up the supply chain," said Robert Edwards, principal analyst at consultancy CRU.
"There's going to be some kind of surplus, but it's a question of how big that is."
CRU has told clients that the change in the copper market balance could be up to a million tonnes this year, but have not finalised a figure yet. At the start of the year, CRU was forecasting a deficit of 53 000 tonnes.
China, which accounts for over half of global copper demand of about 24 million tonnes, is trying to revive economic activity, including construction, a key source of copper consumption, although auto production is still suffering and new orders for factories, a leading indicator, tumbled in February.
Investors had hoped a big stimulus package in China would boost copper demand, but the rest of the world is now imposing severe restrictions on economic activity.
About 30% of China's copper consumption is used to make products for export, Edwards said.
Weaker copper prices may curb the amount of scrap copper coming into the market, moderating the decline in refined copper demand, said Eleni Joannides, principal analyst at consultancy Wood Mackenzie.
Reduced supply as miners halt operations to protect workers from infections will limit any surplus.
But the tumble in copper prices - which have shed 22% so far this year - will take time to spur closures by mines.
Mining costs have been slashed by the sharp fall in oil prices, which have slumped by half over the past two weeks.
Weaker local currencies in countries like top copper producer Chile cuts labour bills and the price of materials bought locally in terms of dollars, in which copper is priced.
"A higher dollar allows them to keep producing at lower costs. Margins are supported by lower local currencies," said analyst Oliver Nugent at Citi.
The combination of the collapse in oil prices and the higher dollar against copper producing currencies has depressed marginal costs to $5,000 a tonne, down from the average of $5,721 last year, Edwards said.
The marginal cost is the cost of extracting copper for the top 10% highest cost producers who are most sensitive to lower prices and are more likely to shut down when prices fall.
But some are protected by derivatives that guarantee fixed selling prices while others will wait for prices to recover due to the heavy fixed expenses of shutting down.
"Prices will have to drop and stay at levels where cash flows become negative for producers to cut on the basis of margins," a commodity trading source said.