Spotlight. Copper set to gain sheen

Despite being the darling of funds, the world copper market this year has been pricing in the anticipated combined effect of a surge in mine supply and a slowdown in demand, especially from China, as a result of which the metal traded in a range between $4,500 and $5,000 a tonne in the first nine months of the year. Indeed, copper prices this year reflected the apprehensions over China’s economic growth, as the Asian major represents over a third of world refined production and half of refined consumption. Will it change in 2017 and beyond? Copper prices have been rallying sharply in the last two months. Are there any cues from this for the investors?

On current reckoning, the global copper market is most likely to swing from a small deficit in 2016 to a small surplus in 2017 and beyond. While that should normally set the stage for downward pressure on prices, there is risk that supplies may under-deliver and consumption growth may marginally outperform, setting the stage for an interesting price performance with a strong upward bias.

The 25-million-tonnes-per-year world refined copper market will probably end up with a small surplus of anything between 1,00,000 and 150,000 tonnes in 2017 and in 2018. This surplus is rather small in relation to the total market size and therefore the market should be considered as balanced.

A crucial issue for copper is potential supply disruption and market-related cutbacks. The current supply situation is rather fragile and there is no clear evidence of smooth future supply growth.

There are a number of green-field projects and brown-field expansions that by their very nature are prone to teething problems and disruptions. Also, labour action is a threat that cannot be wished away.

So, a deceleration in copper supply over the next two years is a clear possibility. While growth from current generation of projects hits a plateau, pipeline projects making up the next generation are decidedly sparse, given the modest levels of investment in recent years.

China’s stimulus is a key driver of demand performance. Indeed, Chinese demand has surprised on the upside this year. As the market heads into 2017, demand growth is sure to stabilise if not improve. With Beijing returning to the time-tested option of spending on infrastructure, demand for copper can only move up. For 2017, Chinese refined copper consumption is forecast at over 12 million tonnes. China has earmarked huge amounts for power grid development that will consume copper for transmission and distribution.

So, while copper prices have under-performed in the first three quarters of this year and in the short run may continue to be range-bound, conditions for a rebound in the medium term are visible. A potent combination of resilient demand, low stocks and a pick-up in supply disruption can result in supply stresses after 2017 with implication for prices.

As of end-November, copper stocks held at major metal exchanges (LME, COMEX, SHFE) totalled 451,780 tonnes, a decline of 30,088 tonnes from stocks held a year earlier, according to the International Copper Study Group. Average LME cash price for November was $5,440/t, up from the previous month’s average of $4,730/t and the year-to-date average is $4,793/t.

So, copper prices may be getting set for a stronger price performance. The perceived excess supply has mostly been in concentrate which has helped refill the supply chain after a few lean years. Indeed, under-investment in the last three years is sure to catch up sooner rather than later by creating supply constraints. That should help a smart recovery in copper prices. Considering the emerging supply-demand scenario, on current reckoning, annual LME cash price for 2017 may average $5,300/t and for 2018 $6,200/t, moving up to $6,800/t in 2019.

The author is an agri commodity specialist

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