ICSG releases Copper Bulletin-February 2015

The International Copper Study Group (ICSG) has released preliminary data for the month of November last year in its recently released February 2015 Copper Bulletin. According to preliminary ICSG data, the refined copper market balance for Nov ’14 showed an apparent production deficit of nearly 40,000 metric tonnes.

World refined production increased by nearly 8% during the first eleven months of 2014. Primary production was up 9%, whereas the secondary production increased by 3%. The global refined copper production during the month of November showed a surplus of 61,000 t. The balance for the initial eleven months of 2014 indicates a production deficit of 640,000 t. This is in comparison with a production deficit of 278,000 t during the corresponding eleven-month period in 2013.

The world copper mine production has increased by around 1.5% during the first eleven months of 2014. Concentrate production was up 1% during the period. The mine output from Chile remained almost unchanged. However, other major copper producing countries recorded increased production. The production increased by 1.5% in Peru, 8% in the US and 9% in the Democratic Republic of Congo. The other nations to report higher output were Mexico (+7%), Canada (+11%) and Mongolia (+35%).

On the other hand, ban on exports of copper concentrates constrained the output from Indonesia by 25% year-on-year. The temporary shutdown at Lumwana mine and reduced output levels from other mines resulted in 7% drop in Zambia’s production. The output from Australian mines during the eleven-month period was down 3%, whereas those from Papua New Guinea were down by 26% on account of mine landslide and heavy rains.

Meantime, global usage of the metal is estimated to have increased by over 10%, boosted by robust demand in China. The Chinese apparent demand increased by 17%. The usage by world countries excluding China has increased by 4%. The EU region, other Asian countries including Japan and Middle East/ North African region countries witnessed growth in apparent usage. The copper usage by the US has declined by 1.5%.

Global refined zinc market ended in deficit of 296 kt in 2014: ILZSG

The latest statistics published by the International Lead and Zinc Study Group (ILZSG) indicates that global refined zinc market was in deficit of 296,000 tons during the year 2014. The total reported zinc inventories declined by 321,000 tons during the year.

The zinc mine output reported declines in Australia, Canada, India, Kazakhstan, Namibia and Peru. However, the fall in output was covered with the increased mine output from other countries including China. Overall, the zinc mine output grew by 1.4% during the year when compared with the previous year.

The refined zinc metal production during the year totaled 13.513 million tons, 5% higher when compared with the 12.873 million tons output during 2013. The rise in refined zinc metal output was mainly due to increased output from China. The Chinese refined zinc metal output surged higher by 14.3% over the year.

The global demand for refined zinc metal increased by 6.5% to 13.809 million tons during 2014. The Chinese apparent usage increased by 11.7%. The imports of refined zinc metal by the country during 2014 totaled 439,000 tons, down almost 30% when matched with the previous year. The refined zinc metal usage ex-China increased by 2.3% mainly on account of increased usage reported from Korea, Mexico, Taiwan and the United States.

The global mine production during the year totaled 13.372 million tons.

The global zinc mine production during the month of Dec ’14 alone totaled 1.144 million tons. The refined zinc metal output during the month totaled 1.192 million tons. The global demand for the metal totaled 1.177 million tons during the month.

Drought in Chile curbs copper production, to trim global surplus

* Anglo's Los Bronces mine could lose 30,000 T due to drought

* Output down 2 pct at biggest copper mine Escondida

* Driest conditions on record in Jan in some parts of Chile

* Chile copper output: http://link.reuters.com/wep24w

 

(Reuters) - A drought in Chile is hampering copper production, a water-intensive business, in the world's biggest producer of the metal, one more factor that could trim an expected surplus this year.

 

Both Anglo American and BHP Billiton have said the extremely dry conditions have hit production due to restrictions on water, used for everything from toilets for workers to separating the metals in the ore body from waste rock and tamping down dust that heavy trucks kick up.

 

"The one caveat or the risk I think that we need to flag... is Chile is still in drought," Anglo Chief Executive Mark Cutifani told a results presentation last week. "It remains a risk, and in fact it was impacting our operating performance in November and December."

 

In some parts of Chile, January was one of the driest since records began, exacerbating a drought that began in 2007, said Chilean meteorologist Claudia Villarroel. Winters in central Chile are becoming drier because of climate change, she added.

 

Indeed, Anglo's Los Bronces mine in central Chile has been the worst affected of the company's mines.

 

It warned that water scarcity at the mine, the world's sixth-largest copper producer, could cut as much 30,000 tonnes or 4 percent off Anglo's overall copper output this year.

 

Output at BHP Billiton's Escondida, the world's largest copper mine, in the bone-dry Atacama, fell 2 percent in the second half of 2014, weighing on a strong operating performance.

 

State copper commission Cochilco has said that water scarcity is "a latent risk for mining in Chile". Lower rainfall and river flow has led the levels of aquifers and reservoirs to drop or dry up completely, giving miners fewer options. In Chile, the situation is complicated by the fact that many of its copper mines are located in the Atacama, the world's driest desert.

 

Analysts polled by Reuters have forecast a global market surplus of 221,000 tonnes this year. But a variety of production problems are already raising questions about whether the market may end up tighter than expected. 

 

Several mining companies have already cut their forecasts for 2015 copper production due to geological and technical issues in other countries. 

 

"This (Chilean drought) bears out our view that there's been too much over-optimism about copper mine production this year," said Caroline Bain, senior commodities economist at consultancy Capital Economics in London.

 

Last month, Cochilco cut its forecast for copper production in Chile this year to 6.0 million tonnes, from a previous estimate of 6.2 million. In 2014 the country produced 5.8 million tonnes. 

 

 

TOO MUCH OVER-OPTIMISM

 

Chile's falling ore grades also mean increasing amounts of water are needed to produce the ore body, industry sources say.

 

The shortages have also pitted mining companies against farmers and others who fear for the quality and quantity of their supplies.

 

Increasingly, miners in Chile are turning to more expensive options like seawater desalination and sewage treatment plants to get water for their needs and for the communities around them, driving up costs.

 

Escondida is building a $3.4 billion sea water desalination plant, which is due to start operations in 2017.

 

State-run Codelco, the world's biggest copper miner, said the drought had not yet directly affected production. But it said it had anticipated the dry conditions and boosted water efficiency, including reaching recycling rates of over 80 percent at some operations.

 

Benchmark copper prices on the London Metal Exchange (LME) touched a 5-1/2 year low last month, partly due to worries of overproduction.

Comex to remain open on Saturday

The commodity market regulator Forward Markets Commission has given permission to the four national commodity exchanges to remain open on Saturday when the Budget is announced.

The three national exchanges – MCX, NCDEX and NMCE – will remain be open for trading between 10 am and 5 pm.

After considering the request from market participants and some of the national commodity exchanges requesting to allow the commodity exchanges to remain open for trading on February 28, the Commission has decided to allow all commodity exchanges to remain open for trading between 10 am and 5 pm on Saturday, said FMC in a statement on Wednesday.

Earlier, SEBI had given permission to stock exchanges to allow trading on Saturday.

Budget 2015-16: Expect commodity transaction tax to be removed, says MCX

MCX Joint Managing Director Singhal says commodity trading volumes have come down significantly since the imposition of CTT, and this is also leading to grey market transactions in which the government gets no revenue at all

MCX is hoping that the commodity transaction tax will be removed in the upcoming Union Budget, according to PK Singhal, Joint Managing Director . 

In an interview with CNBC-TV18, Singhal says Taiwan is the only other country which levies a CTT. He says commodity trading volumes have come down significantly since the imposition of CTT, and this is also leading to grey market transactions in which the government gets no revenue at all. Average daily turnover on MCX has fallen from Rs 50,000 crore to Rs 30,000 crore since CTT was introduced, Singhal says. MCX has regained the market share it lost in the aftermath of the scam at NSEL, Singhal says. He feels the shifting of the Forwards Market Commission to the Finance Ministry from the Consumer Affairs Ministry is a positive step.

Latha: The prime purpose of getting you is to ask you what you are expecting from the Budget for your trade. 

A: If you ask me about expectation then our first basic expectation from the Budget is finance bill - either the Commodities Transaction Tax (CTT) is removed or it is reduced. However, world over nowhere other than Taiwan there is any transaction tax on commodity futures and after the imposition of transaction tax on commodity futures the volumes have fallen down. It is not a question of volume because basically the hedging efficiency has lost and out of top five exchanges in the commodity futures markets in the world three are in China. 

The present vision of our government is to make ‘Make in India’ story successful and for that you need a good hedging platform and that hedging platform is not available for small and medium enterprises (SMEs). Government has rightly exempted agri commodities from CTT but somehow there is a necessity to revisit the CTT on bullion as well as base metal at least because before the imposition of CTT the impact cost in Indian MCX bullion contract was lower than CME. So after the imposition of CTT the cost of transaction has increased manifold. Exchanges are charging Rs 183 per crore as a transaction cost as against that CTT is Rs 1,000 per crore on the sales side which results into the increase in the impact cost from Rs 183 to Rs 683 per crore. 

I think nowhere there is a tax where more than what you are paying to the exchange as a transaction cost you are paying by way of tax and this tax is basically not necessary.

Sonia: Can you give us a sense of how much the volumes have fallen because of the imposition of CTT? 

A: Yes, I can give you a very clear sense. In financial year 2011-12 and 2012-13 and as well as prior to CTT imposition i.e. 2013-14 the volume in MCX – I can tell you about MCX because almost 100 percent volume in base metal bullion and energy takes place in MCX. It was in the range of 52,000 to 55,000 crore per day on single side which after imposition of CTT was reduced to about 30,000 crore. So you can understand how much volume fall has taken place and after that there was National Spot Exchange Limited (NSEL) problem and that is a different issue. So, those volumes fall which was due to NSEL issue has come back. Now we are again having same market share, but you see in agri commodities there is no CTT. Even then there is not much increase in agri commodity volume because you know there are lakh of SMEs and as far as our gold contract is concerned you ask anybody even a small jeweller to the biggest jeweller or exporter in jewellery they hedge on our exchange.

Latha: Any other expectations, have you had conversation with the ministry. You have seen the movement of FMC to the finance ministry from the consumer affairs ministry and now possibly the eventual merger into Securities and Exchange Board of India (SEBI) as well. Is the longer term terrain in which you fight much cleaner now. Are you expecting therefore better business?

A: There are two issues. One issue is very relevant which is most necessary. As per the Nelson report prior to CTT it says that the ‘dabba trading’ or bucket shops volume is three times of the official volume in the exchanges and this bucket shops or dabba trading is all illegal trades. It happens in cash with no audit trail. So it is one of the biggest damage the country has because it is all black money transaction and after imposition of CTT because the cost of transaction has increased as per the market sources it is now about 10 times of the exchange volume. 

So, FMC presently in the present avatar does not have any infrastructure, they don’t have manpower, they don’t have any raid and panel provisions to take action against the dabba traders. So the biggest benefit in case the merger of FMC with SEBI takes place then that power will come, but I have my own doubts about whether the merger will be helpful because commodity basically other than gold all the other commodities are consumable and it is not asset class. Base metal is consumable, energy is consumable.

So basically I don’t think SEBI has a bandwidth or the merger will be the right step but at least if nothing is happening, people make compromise. They think, if FCR is not passed at least it is better that the regulator will have a strong panel action. 

However, one thing I fully agree that shifting of FMC from the ministry of consumer affair to the Finance Minister was a very positive step and it was basically because finance ministry that way is more responsive and I am not saying that consumer affair ministry was not responsible but the point is finance ministry is more clear about what is happening abroad in the commodity futures trade or securities market, so they are more updated.

How can options trading gain ground in commodities ?

The commodities futures market underwent changes in 2003 with many policy reversals. But option-based derivatives are yet to gain ground in commodities. Though the Forward Contract (Regulation) Bill, 2010, has provisions for option trading, its execution requires considerable attention from the regulator, commodity exchanges and market participants.

The government can replace the price support scheme with minimum guaranteed price (MGP). Policy makers are passive on the adoption of option-based trading despite the benefits.

Modus operandi

Option can be over-the-counter and exchange-traded. Similar to the futures, option requires at least two parties to exercise the contract. Exchange-traded option can help to mitigate counter-party credit risk as the contract will be more standardised in nature. Farmers can avoid distress sales if they can opt for a longer put option, paying a put premium. Commodity processors, on the other hand, can hold a long call option, paying a call premium. Intermediaries between farmers and processors can act as option writers holding a short put and a short call position. They can be market agencies that procure from farmers and sell to consumers or civil supplies agencies such as FCI, STC, NAFED, HAFED and several private agencies. The payoff and profit structure are different. While farmers might delimit their potential loss, processors may have unlimited loss if the commodity price falls below the strike or exercise price of the contract. Farmers could wait for a better deal to exercise the contract. Thus, a minimum guaranteed price can be embedded in the long put option. On the other hand, processors can reduce their exposure through dynamic or “delta” hedging that implies that number of call option bought is relative to number of stocks sold. Based on financial aptitude, financial knowledge, and financial behaviour, agents can leverage their risks or increase their spread by formulating several option trading strategies. In addition, they can mix futures/forward and option contract (if offered in identical commodities) to protect them from unexpected losses, such as, “covered call” or “protective put”.

Option pricing

Option pricing (call and put) is important for an efficient commodities market. It depends on several variables known as Option Greek, which includes delta, gamma, vega, theta and rho. For example, one per cent increase/decrease or any absolute in underlying commodity price seeks to impact the relative change in option price or premium. Similarly, market volatility, time of the contract and rate of interest (asset borrowing and storage costs) seek to determine the magnitude of change in that option price.

If option market needs to be efficient, call-put parity should hold. Therefore, there should be a small deviation between market offered rate and an implied rate. Pricing exercise may be accomplished using binomial option pricing, Black-Scholes pricing, KMV-Merton pricing based on the model parsimony and robustness.

Boost for producers

Introduction of option in commodities calls for a careful concern of the regulator and market agencies. It should be implemented in a phased-manner. Fundamental analysis of commodities is required on two fronts: pricing of commodities and variables influencing the option price.

Option need to be introduced in those commodities which are having liquid contracts and significant trade volumes in futures/forward and spot markets. However, speculative asset should be avoided. First, exchange-traded option may be introduced in non-MSP; and then in MSP-based commodities. Commodity exchanges need to work on the contract specification and spread for assessing liquidity. Option contract implementation is critical to encourage commercial users. The coming Budget may shed light on the fate of this derivative instrument, given the possibility of SEBI-FMC merger. Second, since the underlying asset is commodity, a comprehensive study needs to be undertaken with respect to economic fundamentals, price and non-price factors, stock-to-use ratio or carryover stock, crop management practices.

Farmer Producer Companies (FPCs) can work out the prospect of option market as they procure the produce from farmers’ interest groups at MSP or market offered rate and then, distribute to the Small Farmers’ Agribusiness Consortium (SFAC). Instead of procuring at MSP, SFAC through FPCs should offer minimum guarantee price to producer-members which might improve farmers’ marketing decisions and their risk-return metrics.

FPCs need to create or lease in storage space for holding farmers’ produce until they deliver in exchange platform. NCDEX may offer customised contract to FPCs and NABARD might act as clearing agent of commodity exchanges or could train or handhold FPCs for account opening and daily and final settlement.

Service providers need to be empanelled by exchanges to safeguard farmers from any unexpected margin call or mark-to-market loss. In other words, exchanges need to depute some third party to resolve any unwarranted default in the option market.

Can be introduced in goods which have liquid contracts, significant volumes in futures & spot markets

Pre-Budget expectations for commodity markets: Religare Retail Research

According to Religare Retail Research, traders and investors from commodity derivatives market are expecting the government to announce steps to restruc-ture the Forward Contracts Regulation Act (FCRA). This would increase depth in the market and will help in efficient price discovery, says the report.

Pre- Budget Expectations for Commodity Markets: Religare Retail 

The market, like every time, has huge expectations and this time, hopes are revolving around lowering of subsidy burden, widening the tax net, supportive policies for the industry and rational allocation of funds. Also, some key points present in the agenda of the new government which should form part of the union budget should be to re-invigorate investment cycle and reviving Indian economy on a priority basis.

With lower crude prices, government is now in a better position in terms of its fiscal balances as oil imports occupies a major chunk in our im-port bill. Commodity futures trading also deserves attention this time, keeping in mind government’s agenda of Make in India. A large number of measures are required to bring back liquidity and to make market more efficient. 

Union Budget Expectations for Commodity Trading 

Amendment of FCRA: Traders and investors from commodity derivatives market are expecting the government to announce steps to restruc-ture the Forward Contracts Regulation Act (FCRA). This would increase depth in the market and will help in efficient price discovery. There is a need to increase market participation by allowing banks, MFs, FIIs which will also help in preventing price manipulation and help hedgers to efficiently hedge their exposure in physical markets. 

Abolition of CTT: Market participants are expecting the government to re-duce the Commodities Transaction Tax (CTT) which was levied in year 2013 on metals, bullion and a few processed agri commodities. 

Levy of CTT was strongly opposed by commodity exchanges, traders, bro-kers and investors. Commodity trading in India is just 10-year old and get-ting away with CTT may lure more participants, thereby increasing the over-all turnover. In India, more than 80% of the trade volumes take place in bul-lion, metals and energy and CTT has resulted in a significant drop in trading volumes in these segments. Unlike in stocks or agri commodities, daily movement in the above mentioned commodities are generally very low, re-sulting in most of the profits that a trader makes, being lost in the existing charges. FMC needs to take up with the Finance Minister on the need to reduce CTT to bring back liquidity and market depth in the commodity futures trading in the country. The CTT should be reduced to Rs. 1 per crore of trading to encourage the markets and the amount collected should be diverted to improve warehousing and infrastructure facilities. 

Union Budget Expectations for Base Metals Industry 

A reduction in excise duty on copper is widely expected this time, in order to improve the cost competitiveness of Indian capital goods companies. 

The government’s plan to turn India into a manufacturing hub will need a big budget boost. For this, a lot of metal will have to be imported into the country and hence import duty on ores and metals require a slash in import duty. This will likely boost metals’ market in India. 

Union Budget Expectations for Energy Industry 
Finance Minister Arun Jaitley may look at re-imposing five per cent customs duty on crude oil imports to shore up revenues by $3 billion and create a level-playing field for domestic producers. 

Presently, the government does not levy any import or customs duty on crude oil imports. On the other hand, domestically produced crude oil attracts two per cent central sales tax, something which imported oil is exempted from.

Union Budget Expectations for Agri Commodities 

Exemption of CTT for processed agricultural commodities to ensure a pickup in volumes in the futures market 

Passing on benefits of a fall in petrol/diesel prices to ensure reduction in freight charges 

Investment funds in warehousing sector to prevent wastage of food 

Bank accounts for farmers for each and every household for direct transfer of subsidies and loans 

Subsidized loans to farmers and safeguarding them from crop losses through crop insurance 

Availability of quality agri inputs like fertilizers, seeds and advanced technology inputs 

Providing irrigation facilities and electricity at cheap rates to farmers 

Upgrading weather forecasting system – IMD, for accurate monsoon forecasts which could enable farmer to take informed decisions. 

Investments in transportation and infrastructure like roads and railways to reduce transportation costs for farmers for their produce