Understanding Base Metals Supply and Demand

Copper Production

Copper ore is found in the earth’s crust and is either mined from open pits or underground. Most of the world’s copper ore originates from Chile (approximately 30%). The Escondida copper mine in northern Chile is the world’s largest copper mine by reserve. In 2012, it had 32 million metric tons in copper reserves.

Copper ore is processed by breaking the rocks into smaller pieces and is turned into copper concentrates through the process of beneficiation. Then, through the smelting process, copper is extracted from the ore. Once copper is extracted from the smelter, it is melted and cast as anodes. High-purity copper cathodes are created from anodes in the final step of the process.

Copper is a commodity and, if meeting all specifications, can be delivered into exchange-approved warehouses.

Copper Market Fundamentals

Copper supply has increased over the last 10 years in response to China’s industrialization during the commodity “super cycle.” To meet China’s demand, world supply from copper mines doubled over the period 1994-2014. Copper’s price performance is well-linked to the performance of the Chinese economy. 

Mining companies have been cutting costs since 2003, and with any fall in demand, cutting the cost of production has been a way to maintain profitability. The collapse of oil prices from $115 per barrel in June 2014 to under $35 in February 2016 also reduced the price of copper because mining and refining are energy-intensive. The currencies of copper-producing countries have fallen, down 10.4% in 2014 from 2013, and down by 13.4% in 2015 from 2014 (USGS, Bloomberg, CME Group). This would have reduced labor costs.

Copper is widely used in both industrial and commercial markets, from electronics and plumbing to power generation, and is viewed as a reliable indicator of economic health. Copper is often referred to as Dr. Copper because of its ability to predict turning points in the global economy. 

Other factors that positively impact copper demand are government-backed copper, intensive power infrastructure, home appliance subsidy schemes, and promotion of electric vehicles. The growth in urban population with higher disposable incomes increases demand for buildings, home appliances and consumer electronics. 

Aluminum Production

China is the world’s largest aluminum producer, representing 54% of the world’s 58 million metric ton production in 2016, based on International Aluminium Institute data. 

Aluminum is produced through the electrolysis of bauxite (aluminum ore). Australia is the number one bauxite producer, followed by China and Brazil. Bauxite is mined, crushed and processed to remove silicon impurities.

Alumina, the common name for aluminum oxide, is extracted from bauxite. Alumina is extracted through aluminum smelting by the Hall-Héroult electrolysis process. This requires a great deal of energy and smelters are often located near hydro-electric power plants. Primary aluminum is then cast into ingots or used in alloys.

Aluminum is a commodity and, if meeting all specifications, can be delivered into exchange-approved warehouses.

Aluminum Market Fundamentals

The production of aluminum has shifted to China over the last 15 years. During this period, demand increased ninefold. 

China is therefore both a producer and consumer of aluminum. Currently, there is an over-supply of global aluminum, which has put global prices under pressure.

The production of aluminum requires tremendous amounts of electricity. Many smelters in China connect directly to the electrical grid and provide a baseline power demand for underserviced regions in the country. In China, aluminum production serves more than one purpose; it provides the metal for the domestic market, powers communities and provides jobs and economic growth for many municipalities.

The cost of production in China was around $1550/mt and at the start of 2016 and 35% of producers operated at a loss. 

Regional differences in aluminum markets are clear when you compare China to the U.S., which is currently in a structural deficit. Aluminum producers have fared better than copper producers because they have cut production and reduced inefficiencies in response to the lower prices and high stockpiles. Demand for automotive vehicles, which are increasingly aluminum intensive, power transmission investment, housing development and electrical appliances create aluminum demand.

In the U.S., the substitution of aluminum for steel in car manufacturing, such as Ford's F-150 model, will be positive for demand. Whereas the fall in consumption of carbonated soda drinks, the largest share of demand for can sheet in North America, will weigh on the aluminum demand.

For more information, visit the product specification pages on cmegroup.com/metals.

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