Our asset base mainly consists of large scale, low cost copper mines. We are well positioned to benefit from the expected tightness in the copper market, as declining global supply coincides with continued growth in demand.
The Group’s revenues are primarily derived from the sale of copper with additional revenues from by-products of gold, silver and zinc. The Group’s performance is therefore highly impacted by commodity prices, which reflect global supply and demand fundamentals, as well as market sentiment and the activities of financial investors. Commodity prices can be volatile and cyclical as a result of dependence upon geopolitical and macroeconomic factors. The outlook for the Chinese economy is of particular significance as it is the biggest consumer of copper and the main physical market for the Group.
Around 50% of the Group’s revenues arise from the sale of copper concentrate, primarily to China, with some material sold to smelters in the CIS region. Copper concentrate is sold at a provisional LME copper price less TC/RCs, which is adjusted to a final price, typically the second month after delivery. A further 30% of Group revenue is derived from the sale of copper cathode, mainly to Chinese and European customers. Sales are made at a provisional LME price, which is adjusted to a final price, typically one month after delivery. Remaining revenues derive from by-products of gold, silver and zinc.
2018 market performance
The average LME copper price during 2018 was $6,526/t, a 6% increase compared with $6,163/t in the prior year.
The positive momentum in copper markets at the end of 2017 continued into 2018, with copper trading above $7,000/t for the majority of the first quarter. A weaker dollar as well as market anticipation of possible supply disruption from labour disputes lent support to prices. A ban on low-grade scrap imports positively impacted demand for refined copper in China. The copper price achieved a four-year high of $7,300/t in June following the start of labour negotiations at Escondida and the suspension of the Tuticorin smelter in India. The average copper price during the first half of 2018 was $6,917/t.
Sentiment worsened significantly in the second half of 2018. The ongoing trade dispute between China and the USA contributed to increased global economic and political uncertainty. Anticipated disruptions to copper supply did not materialise, with copper prices falling sharply in August following a labour settlement at Escondida. A stronger dollar and an increase in US interest rates have also negatively impacted prices. The average copper price during the second half of 2018 was $6,143/t and copper finished the year at $5,965/t.
The physical copper market remained tight during 2018 and is expected to remain in a small deficit, with exchange stocks continuing to decline. However, market prices for copper have been heavily influenced by negative macroeconomic news flow rather than supply and demand fundamentals, finishing 2018 at prices below $6,000/t.
Average price movement in 2018
The long-term outlook for copper remains positive, despite the negative market sentiment at the end of 2018. There continues to be a broad consensus that the market for copper will enter a period of supply deficit over the medium term. Demand for copper will continue to grow, with sources of traditional consumption supported by new sectors such as renewable energy and electric vehicles. Copper supply is expected to be limited by declining ore grades, restricted investment and a lack of new major deposits. Large scale copper projects with the potential to fill the supply gap are scarce, with many projects facing significant economic, political and environmental challenges. With long lead times required to bring new production to market, this could result in a period of consistent supply-deficit and support higher copper prices.
In the short term the copper market is expected to remain tight as moderate demand increases are offset by new production. As a result, copper prices will continue to be volatile and susceptible to market sentiment.
2018 market performance
Gold prices were stable throughout 2018, generally trading in a range of $1,200 - $1,300 per ounce. The average price for the year of $1,268 per ounce was 1% above the prior year. Silver prices were weak, with an average price of $15.7 per ounce being 8% below the prior year. The silver market is expected to report a surplus in 2018 owing to weak demand factors from industrial usage.
Zinc was an underperformer amongst base metals in 2018 owing to increased market supply from new projects, which returned the concentrate market to balance after a period of deficit. The average LME zinc price was $2,922/t in 2018, 1% above the average price in 2017.
The outlook for gold and silver is highly dependent upon macroeconomic factors. Historically, silver and gold prices were correlated, but 2018 saw this relationship decouple, with silver becoming more dependent on demand from industrial usage. Gold prices could benefit from an increase in inflation or further global economic uncertainty as a source of portfolio insurance.
Forecast growth in the demand for zinc is expected to be met by increases in supply, with China being an important source. Environmental and regulatory scrutiny has curtailed production in China, but future consolidation in the mining sector could result in a resumption of supply growth from larger operations.
Market fluctuations: how we respond
KAZ Minerals continually monitors commodity market and industry research. When performing business planning or assessing investment opportunities, the Group considers a range of commodity price cases and performs sensitivity analysis. The Group has cost competitive assets which can generate positive cash flow in a lower commodity price environment. The Group’s operations are also located in close proximity to its key Chinese market.
The Group is not currently and does not normally hedge commodity prices but may enter into a hedge programme where the Board determines it is appropriate to provide greater certainty over future cash flows. In periods of lower prices, the Group has successfully reduced costs and been able to defer non critical expenditures.
Sensitivity analysis on prices
The approximate effect on EBITDA resulting from a 10% movement in the average realised commodity prices on the Group’s results is shown below, assuming all other variables remain constant: