Mine supply disruption among the world’s largest producers (Chile and Peru), flooding in some producing regions (Peru) and government intervention to restrict exports (Indonesia) all combined to push up copper prices more than 10 per cent in the last quarter of 2016 and the first quarter this year.

Following the end of disruptions, from a high of $6,500 a tonne, copper prices have eased from April, which is widely seen as an orderly correction. At the same time, exchange stocks have risen and Chinese imports have shrunk by around 35 per cent year-on-year in Q1.

There has been much focus so far this year on mine supply disruptions, and rightly so. It is estimated that more than 4,00,000 tonnes are out of the market as a result. It is likely that 2017 may prove to be a record year of mine disruptions due to labour action. No wonder, experts are revising down their expectations for global copper mine production and are now looking for a 2 per cent contraction this year, which allows for more disruptions as the year progresses.

While strikes, export permits and floods grabbed the headlines, less visible has been the surge in scrap availability. The price rally helped draw out hoarded stocks. As a result of improved supply, Chinese scrap imports in Q1 have surged by a fifth. No wonder, this has boosted secondary refined production, offsetting losses on the primary side. It has also displaced cathode demand and weighed down sentiment, prices and premiums, commented an analyst.

But the current scrap glut is unlikely to limit the upside for long as it will be worked through over the coming months. Prices will then resume the uptrend as the underlying fundamental picture remains one of tightening.

In the second half of the year, industrial activities are set to pick up and, across the board, base metal prices will see gains. Copper will be no exception. In the wake of stable demand and tighter supply outlook, copper prices are likely to increase, with the escalation projected at 18-20 per cent.

China factor

As always, China is the mover and shaker of the world base metals market. In case of refined copper, the Asian major accounts for about 35 per cent of world production and 50 per cent of world consumption. As they say, ‘if China sneezes, the world copper market catches cold.’

China has faced a credit squeeze as a result of which manufacturers have been running down inventories. There is now expectation that the credit squeeze will ease and a restocking cycle will emerge in H2. Interestingly, notwithstanding all the stories of a Chinese slowdown, fixed asset investments are running strongly with a marked improvement in private investment. Investment in power grids is expanding, boosting copper consumption.

Global copper demand is expected to increase by 2.5-2.7 per cent this year and next year, while Chinese demand may be higher at 3-4 per cent. Given that concentrate stock levels are still comfortable and scrap availability has improved, global refined production growth is projected at 2.6 per cent.

With refined production estimated at 23.9 million tonnes and refined consumption at 24.1 million tonnes, the market faces a projected deficit. Global inventories, including exchange stocks, have been steadily falling since 2012 and reached 1.7 million tonnes in 2016. There will be further drawdown of stocks the next two years.

While Comex net speculative length has been reined in for now, the emerging market fundamentals support a bullish outlook for prices. Buy at dips could well be the trader’s mantra .

However, timing the fall-off in scrap supply may be important, but difficult. It could well be in Q3.

While copper is likely to average $5,900 a tonne in 2017, Q3 could see the market move to $6,000 and Q4 to $61,00 a tonne on an average.

The author is a commodities and agribusiness specialist.

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