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General Market Commentary
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General Market Commentary
These Factors Will Influence Copper Prices in H2 2017
Copper prices have been trending upward since January, and have surged more than 22 percent since the beginning of the year. On Thursday (August 31), the metal hit $6,872 per tonne, its highest level in almost three years, and it is currently holding near that level.
The red metal’s price increase has been supported by supply concerns caused by upbeat Chinese data and mine disruptions earlier this year. However, many analysts are now warning that the rally might be “overhyped,” with some suggesting that the market may be overreacting to the sharp price increase.
With that in mind, the Investing News Network reached out to Paul Benjamin, research director at Wood Mackenzie. In the interview below, he shares his insight on the copper price rally, the copper market and what’s ahead for the red metal.
Copper prices: Will the rally continue?
As mentioned, copper hit its highest point of the month on Thursday, touching $6,872, a level not seen since September 2014. Prices have jumped more than 7 percent so far in August and are on track to gain for a third consecutive month.
But many experts are warning that a price correction could be just around the corner, as this sharp increase seems to be moving away from fundamentals. “From a fundamental perspective, the recent level of the copper price is hard to justify,” Benjamin said.
Many other analysts, including Barclays’ (LSE:BARC) Dane Davis and Bank of America’s (NYSE:BAC) Michael Widmer, are also cautious, and believe prices may be rising due to investor speculation and not an improvement in fundamentals.
Interestingly, in a recent readers’ survey conducted by the Investing News Network, 63.53 percent of voters said they believe the copper price rally will not run out of steam. Click here to read more.
Copper market: Supply and demand
Supply concerns are one of the main factors driving the recent copper price rally. Earlier in the year, two major copper mines stopped production for several weeks.
More recently, declining inventory levels in global warehouses have increased worries about supply. According to Reuters, Shanghai Futures Exchange warehouse inventory has dropped by more than 8 percent over the past week to reach 187,444 tonnes. Meanwhile, LME warehouse on-warrant inventories not earmarked for removal have halved to 112,950 tonnes over the past six weeks.
In contrast, COMEX stocks have significantly increased in the past week to reach 181,072 tonnes — tha’ts their highest point in 13 years.
Benjamin explained that the movement of stocks between the LME, COMEX and SHFE exchanges often reflects potential arbitrage opportunities. “Investors should keep an eye on the overall stocks picture — in addition to exchange stocks, these include Chinese bonded warehouses, the SRB, producer and consumer stocks, etc.,” he explained.
Despite positive data reports, many analysts were calling for weaker demand from top consumer China as the first half of the year came to an end. But copper demand from the Asian country seems to remain stronger than many predicted earlier in the year.
“The Chinese end-use demand picture so far this year has been slightly better than our initial expectations,” Benjamin said. “However, the ready availability of scrap has largely compensated for any shortfalls in primary supply.”
According to Wood Mackenzie, refined copper demand in top-consumer China is forecast to grow slightly more slowly than last year. “But any ‘hard landing’ for the Chinese economy has thus far been avoided,” Benjamin said.
Looking over to the US, copper bulls have been eagerly awaiting US President Donald Trump’s $1-trillion infrastructure spending plan, a promise he made during the election last year. Many market watchers initially believed copper prices could receive a boost if Trump was able to push this bill through Congress, something that has not yet happened.
“Anything that Trump does manage to achieve in this regard is likely to have a negligible effect on copper demand over the short to medium term,” Benjamin commented.
In terms of a deficit in the market, Benjamin believes that over the short to medium term, the refined copper market looks close to balanced.
“A more significant deficit may emerge early in the next decade unless more miners follow the recent example of BHP Billiton (ASX:BHP,NYSE:BHP,LSE:BLT) and OZ Minerals (ASX:OZL) in starting to build new mines,” Benjamin said.