A memo from Dr Copper
Copper is often referred to as the metal with a PhD, due to its ability to be a gauge of global growth. Dr Copper ended 2017 with a gain of 31.4% on the London Metal Exchange, with year-end predictions that the rally still had steam left. The first few days are testing that prediction, after China’s PMI (Purchasing Managers’ Index) numbers led to concerns over the country’s manufacturing output getting affected by its anti-pollution efforts. In turn, that could signal lower demand for copper.
But these fears may be overblown, as lower output of metals such as copper in China should lead to tighter supply and higher prices for non-Chinese producers, said a Reuters report citing Goldman Sachs. Copper prices had got a boost in end-December after China’s largest copper producer Jiangxi Copper Co. was asked to stop copper production. Of course, China’s ability to surprise means one should keep a close watch on developments there to revise the outlook.
Copper prices are higher by 12% over the start of the December quarter. That is good news for Hindustan Copper Ltd, the state-owned and sole copper mining company in India. The other big producers—Hindalco Industries Ltd and Vedanta Ltd—buy copper concentrate and process it into copper cathodes.
The sharp increase in copper prices could partially explain why Hindustan Copper’s shares have risen by 71.5% since early October. Its net profit rose substantially in the September quarter, at Rs28.6 crore compared to Rs7.4 crore a year ago. In December, the company announced that it reopened an old mine where mining has become viable due to higher prices. If output from this mine comes in while prices remain high, that too can add to profits but the risk is it may turn unviable again if prices decline.
Hindustan Copper’s output has recovered in fiscal year 2018. October and November together saw copper cathode output increase by 47% over a year ago, according to government data. In future, output from its reopened mine will contribute as well. The company will be planning a qualified institutional placement and issue equity shares up to 10% of its capital.
In December, this column had written about how the stand-off over negotiations for treatment and refining charges is a risk for domestic custom copper smelters. While the annual fees are yet to be decided, Reuters reported that Chinese smelters have lowered the floor for these fees by 8.4% in the March quarter, signalling a tight market for copper concentrate. That is a negative development for the smelters.
Apart from the impact on producers, rising prices not just of copper but other metals too are an inflationary risk for the manufacturing sector. Car makers have already hiked prices January onwards. Apart from higher costs for producers, when investment demand eventually recovers, those setting up projects may find that their material costs may have risen. In turn, that could feed into higher costs for the end-consumer.
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