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And despite some price weakness at the start of December, copper is hovering around its highest since August 2014. This is quite a turnaround considering prices in 2015 slowly eroded before hitting a nadir in January 2016.
At that time, three-month 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 for the next few years.
“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 (despite the supply disruptions). We then saw some restocking and fund buying in the third quarter on the realization of concerted global growth,” Metal Bulletin senior analyst William Adams said.
LME three-month copper closed at $6,793 per tonne on December 14, up 20.5% from the start of the year.
Tumultuous start Workers at the world’s largest copper mine, Escondida, began a 44-day strike on February 9 that eventually spread to Peru. Although few expected the strikes to last more than a couple days, the extended impasse wrong-footed 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.
It cited weak refined mining production primarily due to those supply disruptions alongside a lack of major new projects or expansions.
A new round of negotiations at the start of 2018 could expand the current deficit and mining companies have shown caution about expansions to existing mines or breaking ground on new projects. That discipline stems from the downturn of 2015; lingering survival instincts are keeping mining executives from increasing supply too much in the short term.
Chinese stability Ultimately, the overriding reason for the current copper rally is economic stability in China, which accounts for half of all copper demand.
In 2017, the ICSG expected world refined copper production to rise only 1% on a yearly basis to 23.6 million tonnes compared with a 2% increase forecast in 2016, it said.
The country is in the midst of an economic transition away from 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 2017 – President Xi Jinping and the Chinese government injected capital, triggering a property rally and building boom.
The ICSG expects copper production to grow at an annual rate of 2.5% to 24.2 million tonnes in 2018; it also forecasts Chinese consumption to grow by 3%.
Manufacturing, service sector and overall GDP growth also exceeded expectations – the Chinese economy expanded at a rate 6.8% in the third quarter of 2017.
As well, 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.
The Chinese rebound and overall stability was the driving force of copper’s current price rally.
“Throughout all the first half of 2017, there was 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,” he said.