Copper set to shine in 2017, but the future is uncertain

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Monday, April 10, 2017

Analysts agree that 2017 will be a year of copper price recovery, but discrepancies in longer-term demand forecasts lead to varied price projections for the coming years.

Copper will be one of the best performing metals in 2017, with the average price for the year expected to be 14% higher than its 4Q16 average, according to Vanessa Davidson, director of copper strategy and research at London-based consultancy CRU.

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That would put the red metal at US$2.73/lb in 2017, or US$6,020/t.

While the official refined copper warehouses and scrapyards remain well-stocked at the moment, the impact of strikes at major copper mines early in 2017 is generating a shortage of concentrates which will flow through to the refined market as the year progresses, Davidson said at CRU's World Copper Conference in Santiago last week.

CRU estimates that disruptions at Escondida (Chile) and Grasberg (Indonesia) – the world's two largest copper mines – took 425,000t of fine copper off the market in the first quarter and that mine supply will contract 2.5% globally in 2017. Consumption of primary refined copper is due to grow 1.7%, including 2.9% in China.

MINE SUPPLY WANING

Global copper mine supply is expected to rise in 2018 but growth is forecast to taper down to zero by 2021, generating a structural deficit in the refined copper market, according to CRU managing consultant Robert Edwards. The pipeline of projects has shrunk drastically due to a pullback in investment commitments over the last 4-5 years of copper price decline.

CRU forecasts a net increase in annual global copper mine capacity of just 800,000t in the 2016-21 period versus 3.8Mt in 2011-16.

Following the startup of a number of large projects in 2016, including Las Bambas and the Cerro Verde expansion in Peru, no new projects larger than 100,000t/y are due to launch in 2017 and only eight are in the pipeline for possible 2018-21 startup. Half of these are in Latin America: the Toquepala expansion, Cobre Panamá, Chuquicamata Underground and Spence Sulfides.

Codelco's Chuquicamata pit, where an underground conversion is one of the few firm development projects set for startup by 2021

Davidson told BNamericas that output from existing mines is expected to decrease by 1% annually due to lower grades and depletion, adding that mining companies are still focused on optimization and not ready to make major investment decisions, which will keep the pipeline slim.

"As long as global demand continues to expand at close to 2.0% per annum, structural deficits in this market appear inevitable," Davidson told the conference.

CRU forecasts the price of copper will surpass US$7,000/t in 2020-21.

Bart Melek, global head of commodity strategy at TD Securities, also forecasts medium term deficits. "The supply side will be outpaced by demand," Melek said at the event. "We do think copper in the long term has high potential for higher prices."

WHAT IF DEMAND DOESN'T GROW?

Where analysts diverge is on the demand side, which is much slipperier when it comes to forecasting. Goldman Sachs managing director of commodities research Max Layton agreed that the coming months will see gains in copper prices but sees a slowdown in demand growth in the coming years, driven by recession in China.

"Never has a country become so indebted and built so much and not had a recession," Layton told BNamericas. Investment in China has been 40% of GDP for some 12 years and debt has grown to three times GDP.

"On the demand side if we just put in half-trend [global copper] demand growth in 2019-20, then you get small surplus instead of deficit and the difference is US$5,000/t copper instead of US$7,000/t. And half-trend [1% instead of 2%] is not that bearish at all," Layton said in a presentation.

"In the short term we are bullish on copper because the market is underestimating the impact of capital controls and measures the government has taken in the short run to support growth," he added, noting China's redirecting of lending into personal mortgages instead of corporate debt to drive property purchases and its shutdown of overcapacity in steel and coal to combat deflation.

Layton forecasts copper prices at US$6,200/t in the short term, falling to US$5,200/t by 2020. This forecast still represents a more bullish view than a few months ago, when Goldman Sachs was forecasting copper prices to decline to US$4,000/t in the next 2-3 years.

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