The copper market should have known 2017 would be an interesting and potentially beneficial year after seeing US President Donald Trump’s inauguration speech promising to rebuild the United States and a 44-day strike at Escondida mine in Chile.
And even with some price weakness at the start of December, copper is still up 19% in the year-to-date and is hovering around the highest level since August 2014. It is quite a turnaround considering prices in 2015 slowly eroded before hitting a nadir in January 2016.
At that time, copper was trading around $4,500 per tonne on the London Metal Exchange, a level not seen since the depths of the global recession in 2009.
Now following a year of positive Chinese data, an emerging global supply deficit and signs that future technologies such as electric vehicles and solar power will lead to a big demand increase, the red metal is well positioned over the next few years.
“The year has been driven by anticipation of better fundamentals: The run-up from November 2016 to February 2017 attracted a surge of scrap that led to second-quarter price weakness as extra supply needed to be absorbed (this despite the supply disruptions), we then saw some restocking and fund buying in the third quarter on back of realization of concerted global growth,” Metal Bulletin senior analyst William Adams said.
Three-month copper on the London Metal Exchange closed at $6,793 per tonne on December 14, up a staggering 20.5% since the beginning of the year.
Workers at the world’s largest copper mine, Escondida, began a 44-day strike on February 9 that eventually spread to Peru. From the beginning, the strikes were not expected to last more than a couple days, but the extended impasse flipped the entire market.
It also set the stage for an extended deficit through the end of the decade with the International Copper Study Group (ICSG) forecasting a 150,000 tonne deficit in 2017 and 105,000 tonnes in 2018.
The Lisbon, Portugal-based firm cited weak refined mining production primarily due to those aforementioned supply disruptions along with a lack of major new projects or expansions.
A new round of negotiations at the start of the New Year could expand the current deficit and mining companies have exhibited caution on expansions to existing mines or breaking ground on new projects. That discipline stems from the downturn of 2015 and the lingering survival instincts is keeping mining execs from increasing supply too much in the short-term.
In the end, the overriding reason for the current copper rally is the economic stability in China. The world’s most populous country is also a global vacuum for the copper industry, with 50% of all demand being gobbled up as the country continued to build bridges, highways and dams.
In 2017, world refined copper production was expected to see an increase of only 1% on a yearly basis to 23.6 million tonnes, compared with a 2% increase forecast in 2016, the ICSG said.
The country is currently in the midst of an economic transition away from these metal-intensive infrastructure projects and towards a service-oriented economy where its burgeoning middle-class supports GDP growth through consumption.
That economic transition was alarming to an industry that has become overly-reliant on consistent Chinese demand. But those fears were alleviated throughout the year as President Xi Jinping and the Chinese government kept capital keep, triggering a property rally and building boom.
In 2018, refined copper production is expected to grow at an annual rate of 2.5% to 24.2 million tonnes in 2018. China’s consumption is forecast to grow by 3% next year, the ICSG said.
Manufacturing, service sector and overall GDP growth also exceeded expectations with the Chinese economy expanding at 6.8% in the third quarter.
Plus, China’s “One Belt, One Road” (OBOR) project – an estimated $5 trillion infrastructure project that connects 60-plus countries throughout the Eurasian region – is being hailed as a once-in-a-century opportunity for the entire commodities industry.
In the end, no matter what transpired this year, the Chinese rebound and overall stability was the driving force behind copper’s current price.
“Throughout all the first half of 2017, there has been a reluctance by some to get bullish so they ended up chasing prices higher,” Adams continued.
“The pullback now is being blamed on a China slowdown but I think that’s just a convenient excuse – I think it’s just stale long liquidation (a realization prices have run ahead of the fundamentals) plus some end of year profit-taking,” Adams concluded.