Copper has been a bit of an enigma in 2016 so far. While other base metal prices have surged on the back of supply cuts and strong demand, copper has languished been broadly flat. Prices have consolidated over the past few months around 215 c/lb but the market is likely to break out towards the end of the year.
But which way? According to Commerzbank copper has the potential to play catch-up with other base metals through to the end of the year. However, Goldman Sachs believes that the direction is down with prices forecast to fall below the 7-year low set in January. Here are four factors to consider.
A wall of supply: It was in October 2013 that Goldman Sachs started to warn that copper was transitioning into a supply-demand surplus. “For copper, Chinese demand was never the problem. Instead, it is weak demand ex-China against new supply growth that has held copper prices back, and is on the verge of creating an oversupplied market,” the bank said in a report.
A view that the bank have reiterated recently. “Over the next three to six months we believe that copper will continue to under perform zinc, with copper about to hit a wall of supply, while the zinc concentrate market continues to tighten.”
For Goldman, the main expansion in mine supply through to the first quarter of 2017 is expected to come from the Grasberg mine in Indonesia, Escondida in Chile and Sentinel in Zambia, according to the report. Growth from Cerro Verde and Las Bambas in Peru (the latter one of the main engines of supply growth in 2016) may also contribute.
Unlike previous periods where oversupply has gradually been eroded, setting the market up for a rebound it may just be the case that the scale of boom in prices in the period to 2011 now means that there is just so much more supply to be weaned off.
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Disruptions to copper supply have been low so far in 2016, affecting less than 2% of supply, versus expectations near 5% has helped contribute to the poor price performance. A return to ‘normal’ levels of disruption could take the shine off new supply coming on-stream in 2017.
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China:China’s copper demand has grown by around 3.5% this year, fueled by a boom in property, power grid investment, white goods and vehicles. The outlook for copper in the coming months is also looking positive according to Macquarie’s China copper survey, which interviews smelters, traders and fabricators who are active in China. Fabricators and traders have expressed intentions to build inventories while smelters are restocking raw materials.
Chinese imports of refined copper have declined over the year as Chinese output has increased. However, China may also step up refined copper imports in coming months as the weaker yuan has boosted domestic copper prices, opening up arbitrage opportunities.
The potential downside to Chinese demand relates to China’s efforts to cool its property market. For the first time China’s Politburo has signaled a policy shift to control asset price bubbles (report) and after bubbles in everything from their equity markets, to commodities and various other assets property is now the focus of attention.
Although the change in emphasis is significant the impact on overall Chinese copper demand may not be all that severe (although there could be a sting in the tail). First, previous attempt to cool the property market have taken many months and since construction activity and hence copper consumption tends to lag prices the potential is for further strong demand in the short term. Secondly, construction accounts for a relatively small amount of overall Chinese copper demand – 15% compared with around 50% for power and 35% from manufacturing.
The potential sting in the tail is that efforts to curb the boom in property prices spills over into the broader economy. Just as Chinese authorities efforts to prevent the boom in the country’s equity market sparked fears of a broader slowdown, a sharp drop in property prices is likely to have a much larger impact since property forms a much larger component of the average Chinese citizens wealth.
US infrastructure spending: Prices of the metal, used in pipes and wiring rose after a recent report showed sales of new US homes held close near to a 9 year high. But could the outcome of the the US Presidential election be even more supportive? Both candidates have acknowledged the poor state of the country’s infrastructure. Trump has indicated that he will roll out more proposals in the near future but has stated that his plan will boost the U.S’s infrastructure. In contrast, Clinton’s plan would amount to roughly $60 billion per year in spending on transportation projects. The three metallic resources that would be expected to gain most from this would be aluminium, steel and copper.
Technical: Copper has been trading in a symmetrical triangle since the start of 2016. This typically means a period of consolidation, but once the price moves out of the triangle (and is followed by an increase in trading volumes) a sharp breakout price movement tends to follow. But which way?
— Ant (@AntMwah) October 28, 2016
The 5-wave increase in copper prices at the start of the year might indicate that the breakout is towards the upside. On the other hand the market is very vulnerable to the downside too. Below 208.50 cents per lb there is little support before prices touch the earlier low of 197 cents per lb and if prices were to fall below 200 cents per lb that would break a long term upward trend stretching all the way back to 2002 – a move that would provoke further selling.