After a frantic week of meetings between copper producers, consumers, traders and analysts, a fragile consensus has emerged that low prices seen at the start of 2016 could mark the bottom of the cycle, as a rebound in investment in property and infrastructure in China looks set to rebalance the market following a long period of oversupply.
The rapid improvement in the outlook has underpinned a 13% rally in copper prices between October 24 and November 8, when the three-month contract topped out an intraday high of $5,248.50, at its highest level in a year and up from $4,640 at the start of the year.
After several consecutive years of falling prices and a steady deterioration in the supply and demand outlook, there were plenty of caveats to the newly optimistic forecasts, and concerns about the sustainability of the rally have only become more vocal this week, as copper prices hit consecutive one-year highs, even in the face of data showing a 15% decline in copper imports in China.
A win for Donald Trump in the US presidential elections could also cause the improving fundamental outlook to unravel quickly, sources also said as the electorate went to the polls on Tuesday November 8.
But if the rally is sustained through to the end of December, it would mark the first annual increase in prices since 2012, and the largest since 2010.
All eyes on Chinese demand
The unexpectedly bullish mood is centred on bets that Chinese demand will outperform next year and the supply disruptions that typically plague the copper industry will return after an uncommonly strong performance seen this year, as analysts at banks including JP Morgan, Citi and Macquarie have noted since events in London drew to a close last week.
Western macro funds are also taking a fonder view of copper, viewing it as a proxy for Chinese growth, while previously bearish Chinese funds are for the time being focusing their attention on the surge in steelmaking raw materials in China, broker sources also told Metal Bulletin on the sidelines of events held during the week.
“LME Week 2016 saw the first improvement in market sentiment versus the previous year’s gathering since 2010. After five years of worsening commodities market malaise, this year the producers, consumers, traders, analysts and investors that met in London recognised a distinct brightening in the outlook,” Macquarie told clients on November 4.
“Even copper, this year’s laggard, has begun to show some price risk to the upside, with fundamentals improving and physical market terms turning more bullish lately. The concentrates market in particular appears to have tightened appreciably, having been soft for much of the year,” Macquarie said.
Citi analysts noted a “distinct convergence of less-bearish views” on copper during the week, driven by a recent outperformance in Chinese construction and infrastructure spending, which is likely to feed into an improvement in copper usage next year.
“Better-than-expected demand, driven by Chinese construction and infrastructure spending, was widely regarded as the saving grace for copper. Chinese 2016 demand estimates now range between 5-7% compared with 0-3% projections at the start of this year,” the bank wrote on Tuesday.
JP Morgan, which took profit on an advised short position in the December contract shortly before the 13% rally began, said LME Week was “decisively more optimistic” than it has been in recent years.
However, the bank maintains a balanced outlook for next year, and expects prices to range $4,500-$4,900 per tonne.
Tightening spot copper concs market
The “most interesting” takeaway from the week came on the supply side, as the spot market for copper concentrates tightened rapidly, with sales to smelters reported in the low $90 per dry metric tonne/9 cents per lb level, down from levels of about $102-105/10.2-10.5 cents at the end of October, Macquarie noted.
“The whiff of scarcity at the gathering emboldened miners to talk of the benchmark settling around or perhaps below this year’s $97.35/9.735 cents. Smelters predictably expressed expectations for something higher but sounded less certain and appeared hopeful for triple digits,” Macquarie said.
The bank attributed the tightening in the spot market to lower-than-expected output at Escondida and nervousness over recent community protests at the massive Las Bambas mine in Peru.
Las Bambas has put in a standout performance this year, with operator MMG on track to hit the upper end of production guidance of 250,000-300,000 tonnes of contained copper in 2016, after producing 224,375 tonnes in the first nine months of the year.
Due to the frequency of outages caused by low ore grades, technical setbacks, and community and regulatory issues, it is rare for miners to beat the top end of their production targets, but some analysts have forecast that Las Bambas will do just that in 2016.
Build-up of stocks
However, concerns about the mine’s performance have emerged as news spread that difficulties in transporting concentrates from the mine to the nearest port during community protests has led to a significant build-up in inventory at the mine site.
Macquarie analysts were told that about 70,000-80,000 dry metric tonnes of concentrates are being stored at Las Bambas. While deliveries from mine to port have resumed, further blockages could lead to storage constraints at the mine, other market sources said during LME Week.
However, one rival producer noted that Las Bambas has proven to be an “excellent” operation since coming into commercial production in July, and cautioned that miners heading to Shanghai for Cesco Asia next week should not forget that the market has been loose throughout much of the year, partly as a result of its out-performance.
“We need more than three days of bullishness to really justify a big drop in the benchmark,” he said as the week drew to a close.
In the wake of an unexpectedly bullish LME Week, copper prices are on track to record the first annual increase in four years, reflecting growing confidence that demand could outperform next year at the same time as mine supply growth splutters.