Copper prices had a rocky start of the year, declining more than 6 percent in the first three months of 2018. Increasing geopolitical concerns, surging warehouse inventories and a weaker Chinese demand put pressure on prices.
Despite this, some analysts remain cautiously optimistic about the future of the red metal and expect prices to pick up in the next few months.
Read on for a more detailed overview of the main factors that impacted the copper market in the first quarter of 2018, plus a brief look at what investors should watch out for in the next few months.
Copper price update: Q1 overview
In the first quarter of the year, copper prices performed in a downtrend, declining more than 6 percent to end March at US$6,683 per tonne.
As the chart below from Kitco shows, the copper price reached its quarterly peak at the beginning of January when it traded at US$7,202 a tonne, supported by a weaker US dollar and a strong demand outlook from China.
Copper’s lowest price in Q1 came in March, when it fell to US$6,499 per tonne. Copper prices pulled back as the greenback rebounded and warehouse inventories surged.
Copper price update: Supply dynamics
Last year, all eyes were on copper mine disruptions. Supply stoppages at the top two copper mines, BHP Billiton’s (NYSE:BHP,LSE:BLT,ASX:BHP) Escondida and Freeport-McMoRan’s (NYSE:FCX) Grasberg, are estimated to have brought global 2017 copper output down by 5 to 7 percent.
In 2018, there will be several labor negotiations as well but analysts believe mine supply will grow.
“Having been more or less static last year, copper mine production is seen growing by 2.5-3 percent this year, which is expected to help facilitate an increase of similar magnitude in refined output,” Karen Norton, GFMS Thomson Reuters base metals analyst, said.
According to the expert, the most notable new projects this year will be First Quantum’s (TSX:FM) Cobre Panama project, which will now have a slightly larger capacity than previously planned at 350,000 tonnes per year, and Southern Copper’s (NYSE:SCCO) Toquepala expansion in Peru.
“More immediately, we have seen news of restarts of some capacity which had previously been idled in the downturn,” Norton said.
Freeport’s El Abra mine in Chile is one of the most significant examples, she added. The mine has been operating at a reduced rate since the second half of 2015, but is expected to work at full capacity this year.
“This is a year were most of the supply that is coming on is from mines that are restarting production or existing mines that are boosting their output,” ING commodities strategist Oliver Nugent said.
Aside from Glencore’s (LSE:GLEN) Zambian production, Norlisk Nickel (MCX:GMKN) in Russia and output from some mines in Australia and Africa, he expects growth from Peru and a rebound in Chile’s production.
“Although supply is expected to rise slightly on new projects and the resumption of operations in Zambia and the Democratic Republic of Congo, the market will likely remain in deficit,” FocusEconomics analysts said in their latest report.
In contrast, analysts at GFMS Thomson Reuters forecast a surplus of 100,000 tonnes this year.
“[However,] it is a busy year for labor contract negotiations and a repeat of last year’s lengthy strike at Escondida might throw a spanner in the works,” Norton said.
According to Nugent, the risk of mine disruptions is always present in the copper market. “Every year we expect 5-7 percent of mine supply to be lost, and this year we expect the same,” he said.
As a result, the analyst estimates the copper market will be fairly balanced this year.
He also mentioned inventories levels as a factor to watch, as the market has seen a lot of stockpiles move from invisible to visible. This is a trend investors need to get used to, the analyst said.
“We expect inventories to be drawn down going forward,” said Nugent, adding that it’s not unusual for stockpiles to be built in Q1.
Copper price update: Demand forecast
In terms of demand, all eyes are on China, the world’s top consumer, as the main factor driving copper prices.
According to FocusEconomics, signs of softer activity have emerged in the Asian country. In fact, the Chinese manufacturing PMI fell to an over one-year low in February.
“We expect Chinese copper demand growth to hold up reasonably well into the second quarter, but to slow somewhat in the second half, undermined primarily by the property sector,” Norton said.
Even so, the overall picture is not especially disconcerting. That’s because “the picture elsewhere is improving such that overall consumption growth, though still unspectacular, will be slightly higher than in 2017,” Norton added.
Aside from expected improvement in the United States, the world’s second biggest consumer, emerging nations such as Brazil and India will have a greater positive influence.
“After five consecutive years of decline Brazilian demand is expected to pick up again, as the economy finally recovers,” Norton said.
Meanwhile, demand in India is also expected to increase, despite being offset last year due to demonetization measures which affected construction activity.
“Growth is expected to pick up pace again as the Smart Cities Mission continues, and despite criticism that progress so far has been slower than expected,” Norton added.
Copper price update: What’s ahead?
Looking at the next months of the year, there are several factors copper-focused investors should keep an eye on.
“[Investors should pay attention to] trade war concerns that might spill over and curtail global economic growth,” Norton said.
Other geopolitical factors, such as the escalation or otherwise of hostilities between Russia, the United States and other western nations could also impact the market.
“There’s no doubt the risk of a global trade war derailing global growth is something we have to keep in the corner of our minds. We’ve got low probability on it but it has certainly been weighing on sentiment,” Nugent said.
Other factors to watch are the US dollar and US politics, China’s credit and the reform of the financial sector in the Asian country, he added.
“Looking beyond 2018, prices look set to trend upwards, on greater demand for infrastructure, electric vehicles and renewable energy,” FocusEconomics analysts said.
Market watchers polled recently by the firm gave mixed copper price predictions for the second quarter of 2018. Looking ahead to the next few months, they estimate that the average copper price for Q2 2018 will be US$6,825 per tonne.
The most bullish forecast for the quarter comes from Pezco, which is calling for a price of US$7,415; meanwhile, E2 Economia is the most bearish with a forecast of US$5,836.
For her part, Norton said the copper price performance in the first quarter of the year was in line with her expectations, as it still rose by one-fifth year-on-year on an average basis and by 2 percent sequentially.
“We are of the view that Q1 will prove to have been the strongest quarter for the market this year, with prices generally trending lower in the following six months, before picking up in the final quarter as supply growth starts to slow again on a more sustained basis,” she added. - Source: investingnews.com -