Market trends and context
Analyses of OECD and International Monetary Fund presented in 2017 unambiguously indicated that the global economy is in a phase of accelerated, synchronized growth for the first time in many years. It should be noted that the recovery observed in the US is one of the three longest recoveries since the mid-19th century.
Source: Bloomberg, KGHM Polska Miedź S.A.
This trend is confirmed by the latest readings of global GDP growth which, according to IMF estimates, increased in 2017 by 3.8 percent (compared to 3.2 percent growth in 2016). What is important, the dynamic global growth was affected both by the economic performance of emerging and developing economies and developed countries. Approx. 120 economies responsible for three-quarters of global GDP recorded a yoy increase in 2017. IMF expects that the dynamic growth of the global economy will be continued in 2018-2019, forecasting a 3.9 percent growth rate per annum.
Source: IMF, KGHM Polska Miedź S.A
The market enthusiasm observed in 2017 is attributable undoubtedly to the final phase of the accommodative monetary policy, which continued to enable business entities to operate in the environment of negative real interest rates and expanded the balance sheets of central banks on the asset side to the record high of USD 14 trillion. In addition, the increased risk appetite among investors resulted from stabilization of the political environment, which just one year earlier brought numerous uncertainties to the markets. The investors’ euphoria does not seem to be shared by analysts, who point to the low increase in work efficiency, the growth level in many cases exceeding the potential of the economies, and increased risk of investment in individual assets. Among the concerns regarding the continuation of the scenario that is positive to the global economy, they also mentioned the probable inflation pressure, plans to the reduce central banks’ balance sheets expanded by the quantitative easing programs, and gradual increase in the interest rates by the world’s main central banks.
Positive growth readings in the countries of key importance for the global economy influenced the consumption forecasts and improvement of the investors’ sentiment towards commodity markets. After several years of commodity price drops, which have led to liquidity problems among a number of companies, forcing them to restructure and revise or suspend their investment plans, 2016 brought a price rebound. The continuation of price increases in 2017 and the solid foundations for market optimism, strengthened the conviction of the investors and the analysts of individual markets that the increases are a sustainable change of the trend rather than a temporary correction of the price declines. The positive moods in the commodity markets were driven both by fundamental factors and by macroeconomic considerations. Insufficient funds earmarked by commodity producers for investments brought the current and future limitations on the supply side. However, the synchronous economic growth in key global economies had a positive impact on the consumption of industrial commodities. The next driver of commodity price increases was the weakening of the US currency – the value of the USD against the currency basket (the dollar index) dropped by nearly 9 percent in 2017. The depreciation of the dollar occurred despite factors that usually result in its strengthening, such as: tightening of Fed’s monetary policy, rising disparity of interest rates between the US and the world’s key economic zones, and the announcements of pro-growth reforms of fiscal policy by the Trump administration.
It should be noted that the synchronization of growth in the global economy and the observed weakening of the US currency had quite diversified impact on the prices of individual commodities. Annually, the general price index, Bloomberg Commodity Index (BCOM) increased by 1 percent, mainly due to the industrial commodity price (+16 percent) and precious metal indices (+10 percent). The situation in energy commodities (-5 percent) and agricultural products (-12 percent) was different.
Source: Bloomberg, KGHM Polska Miedź S.A.
The market in 2017
The growth of the global economy which usually stimulates consumption of industrial metals, stable demand growth rate in China, delays in mining projects leading to a limited supply growth rate and hopes of the market participants associated with potential demand from the electric car sector supported copper prices in 2017. A significant role in the dynamic price increases was played by the “macro” mutual funds, which base their investment decisions on macroeconomic readings. Following a weaker beginning of the year, in the next months, copper prices started to dynamically increase to stabilize in the last few weeks of 2017 in the range of 7,000 USD/t, far above last year’s levels. As a result, the copper price in USD as at end of 2017 was 30% higher than at the beginning of the year.
The average annual copper prices at the London Metal Exchange (LME) in 2017 were at 6,165 USD/t, 27% below the average price from 2016 (4,862.59 USD/)t.
Copper prices at LME (USD/t)
Despite continuing weakening of the US dollar, silver prices have not recorded increases. A less busy political calendar in the world translated into a higher risk appetite among investors, supporting more risky assets (cryptocurrencies, commodities, EM currencies) and decreasing the demand for the saturation assets (including precious metals). Silver prices in 2017 were moving sideways, reaching by the end of the year the level of USD 16.87 per ounce.
The average silver price quoted at the London Bullion Market (LBMA) recorded a slight decline in 2017 by 0.5 percent and stood at the average level of USD 17.05 per ounce compared to USD 17.14 per ounce in 2016.
Silver prices on LBMA (USD/troy ounce)
The average annual nickel price at the LME in 2017 was 10,411 USD/t and was 8 percent higher than the average price recorded in 2016 (9,609 USD/t) reaching at the end of the year 12,260 USD/t. Nickel prices benefited from the robust macroeconomic environment and the weakening of the American currency. In micro terms, investors noticed the supply limitations in China (as a result of environmental reforms), increasing demand from the steel industry and future prospects of consumption associated with the production of batteries. On the other hand, a more dynamic growth rate in prices was hindered by significant global inventories of this metal.
Nickel prices on the LME (USD/t)
From the beginning of 2017, the molybdenum market saw systematic price increases mainly on the back of the improved fundamental situation in the market. Due to the unexpected stoppage in Chinese mills in Q2 and Q3 2017, production in China significantly dropped. However, the losses associated with the disruptions were offset by higher production in South American countries. However, a significant increase in demand for molybdenum was observed in the steel industry.
The average monthly molybdenum prices during the year ranged from 7.3 USD/lb (January 2017) to 9.0 USD/ lb (December 2017). As a consequence, the average price of the metal in 2017 was 8.2 USD/lb and less than 26% higher than the average price in 2016 (6.5 USD/lb).
Molybdenum prices on CRU (USD/lb)
In 2017 the US dollar recorded significant weakening against other currencies – the value of the USD against the currency basket (the dollar index) dropped nearly 9%. The depreciation of the dollar occurred despite factors that usually result in its strengthening, such as tightening of the Fed’s monetary policy, increasing disparity of interest rates between the US and the world’s key economic zones, and the announcements of growth USD/PLN exchange rate, according to NBP reforms in the fiscal policy implemented by the Trump administration.
The USD/PLN exchange rate after reaching many years’ highs (approx. 4.25) by the end of December 2016, fell sharply to approx. 3.48 at the end of 2017. The USD/PLN exchange rate (NBP) in 2017 stood on average at 3.78 USD/ PLN, down 4.2% compared to the 2016 rate (3.94)
USD/PLN exchange rate, according to NBP
The analysis forecast consensus points to a continuation of the economic growth in the world’s key economies in the upcoming years. This should have a positive impact on the commodities traditionally used in industry, such as copper, nickel or molybdenum. In addition, the positive assumptions regarding macroeconomic conditions should also stimulate enthusiasm among institutional investors towards the metal markets. Among the threats to the positive picture of the macroeconomic environment, one should list possible escalation of the trade conflict between the US and China and its expansion to other regions, resulting in limitation of international trade exchange. In addition, a continuation of the growth will be threatened by systematic tightening of the monetary policy and reduction of the Fed’s balance sheet in the US and the vision of similar measures on the part of other central banks in the world. Copper prices in the global markets should remain on an upward trend, also due to the fundamentals. The demand for the red metal is as, a rule, positively correlated with the economic growth of the world’s key economies. The synchronous growth of developed and developing countries should have a positive impact on the consumption of copper.
The main concerns in this regard are related to the evolution of the Chinese economy towards a more balanced model based on services and internal consumption. Analysts add, however, that slowdown of the pace of growth in China and lower expenditures on infrastructural investments do not have to translate into the lower consumption of industrial metals, which may find other sources of demand associated with the “green” technology. In accordance with the IDTechEx report commissioned by the International Copper Association (ICA), the increasing number of electric cars will translate into a tenfold increase in copper consumption in this sector over the next decade. The increase in the significance of electric cars in the next decade will take place thanks to the development of technology, reduction of the differences in the prices of hybrid or electric vehicles and those with traditional engines, and increased availability of charging stations. Obviously, the pace of the revolution in the electric car industry is currently hard to estimate. However, it should be noted that the production of one electric car uses 2-4 times more copper than in traditional combustion engine vehicles. In addition, the green revolution in the automotive industry will entail the necessity to build the infrastructure required for charging car batteries. On the supply side, the market will face limitations resulting from lack of investments in copper production over the past five years, when the prices of most commodities reached their long-term lows. In the currently observed pricing environment, producers cautiously return to the investment path, but the scale and size of the mining projects being executed are still limited. Additionally, in the short run, analysts point to the significant threat of disruptions in the production of the existing mines due to the rich calendar of renegotiation of employee contracts in Chile in 2018.
Copper market balance forecasts (000s of tons)
According to CRU International, global copper mining production in 2017 amounted to 20,244 thousand tons. In the same period, KGHM Group Companies produced in total 553.6 thousand tons of mining copper, which is approx. 2.7 percent of the global production. In the ranking of the biggest global mining copper producers, the KGHM Group ranked sixth in 2017.
Source: CRU, KGHM Polska Miedź S.A.
Global production of ref ned copper, according to CRU projections, amounted to 23,222 thousand tons. Production of ref ned copper in the KGHM Group Companies stood at approx. 544.8 thousand tons, i.e. 2.3 percent of the global production and puts the Group outside the top ten producers. In the ranking of the biggest producers of electrolytic copper, Poland ranks tenth.
Top 10 countries - ref ned copper producers
|6||Democratic Republic of the Congo||877|
Source: CRU, KGHM Polska Miedź S.A.
In 2017, the global mining output of silver was 823 million troy ounces (estimates according to CRU International). In this period KGHM Group Companies produced in total 48.4 million troy ounces of concentrate silver, approx. 5.9 percent of the global production of this metal. According to a survey conducted annually by the World Silver Survey, in 2017, the KGHM Group ranked second globally in terms of the production of metallic silver, and Poland ranked seventh in the ranking of countries producing this precious metal.
Top 10 - silver producers
|2||KGHM Polska Miedź S.A. (Grupa)||1 244|
|3||Glencore plc.||1 174|
|5||Polymetal International plc.||834|
|6||Cia. De Minas Buenaventura S.A.A.||822|
|7||Pan American Silver Corp.||777|
|8||Hochschild Mining plc.||595|
|9||Volcan Cia. Minera S.A.A.||538|
|10||Hindustan Zinc Ltd.||526|
Source: CRU, KGHM Polska Miedź S.A.
Top 10 - countries producing silver
Source: GFMS World Silver Survey, Thomson Reuters, KGHM Polska Miedź S.A.