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Weak supply growth seen fueling copper rally

Apr 07, 2017 | 02:33 PM | Dalton Barker
Tags copper, copper prices, supply, demand, miners, strikes, flooding, Dalton Barker


CHICAGO — Copper prices are expected to average $6,500 per tonne ($2.95 per pound) in the second quarter 2017, and the long-term forecast is optimistic as demand should outstrip future supply, according to an April 6 research note from Bank of America Merrill Lynch.

The London Metal Exchange’s three-month copper contract closed the official session at $5,810 per tonne ($2.64 per pound) on April 7, down 0.9 percent from $5,865.50 per tonne ($2.66 per pound) one week earlier.

After commodity prices crashed in 2015, mining companies cut capital expenditures and slashed expansion plans. Thus, given the length of time it takes for mines to be developed, the overall supply curve will be unable to match future demand, according to analysts with the New York-based bank.

“Copper prices have bottomed out. This was partially influenced by a rebound of Chinese economic activity through 2016,” the note said. “However, mine supply growth has also slowed. Indeed, the six-year—that’s how long it can take to develop a mine—moving average of copper price changes and mine supply growth is inversely correlated. As such, and looking out to 2020, supply additions should continue to slow.”

With that six-year timeline for new mines and current market dynamics, the bank anticipated price stabilization and the next bull market for the red metal, estimating a long-term copper price average of $7,168 per tonne ($3.25 per pound) after 2019.

When copper prices exceeded $10,000 per tonne in the previous commodities super-cycle, miners spent billions on expansion and exploration efforts. Since then, however, miners have been more apprehensive, especially with a decline in ore grades—from 1.6 percent in 1990 to just below 1 percent today—lifting average operating costs from around $2,500 per tonne ($1.13 per pound) to around $4,000 ($1.81 per pound), the bank estimated.

“Many projects can only be justified with prices at or above spot quotations. As a result, and given the pain the industry has just gone through, miners are less willing to pull the trigger,” the bank said.

Analysts credited the current price rally to a stronger Chinese economy following stimulus measures in that country since 2015. But more importantly, supply growth has slowed and could contract by 3.3 percent year on year in 2017.

Supply outages have topped headlines this year, particularly in South America. In Chile, workers at Escondida mine—the world's largest copper mine—finally ended their strike. Meanwhile, Phoenix-based Freeport-McMoRan Inc.'s Indonesia subsidiary recently resumed production of copper concentrates at its Grasberg mine after contending with export issues.

Altogether, those issues and severe flooding in Peru have shifted the copper market into a modest deficit.

“In short, we are confident that the reluctance of miners to meaningfully increase spending on new projects is unlikely to change imminently. This is turn suggests that a marked increases of mine supply is unlikely,” the research note concluded.

Dalton Barker
[email protected]