Initially the volatility was driven by speculation rather than fundamentals. Prices were buoyed after the US election on expectation that it could result in significant US infrastructure spending. Whilst in early 2017, disruptions at the world´s three largest Copper mines pushed the red metal to 20 month highs. As the respective disputes were resolved and uncertainty set in over the US governments’ ability to deliver on the extent of infrastructure spending promised, prices once again dipped, eroding most of the gains achieved during 2017.

However, the market should swing into a deficit (undersupply) position sooner than originally anticipated, meaning that copper prices are likely to have reached their floor. Consensus is that this will happen in the second half of the year. There is also potential for further upside in the near term. Supply disruptions could continue in the second half of 2017, as a number of other mines in Chile have worker contracts up for renewal.

From a demand perspective, China has re-confirmed that it expects to achieve growth of 6.5% in 2017 and 6.3% in 2018 and 2019. Whilst an uncertain political, policy and trade environment has created additional uncertainty over global growth, demand from China and emerging markets should support higher copper prices.¹ Thus gradual price increases should start to be more pronounced from Q4 2017 onwards and this time the higher prices will be here to stay.

The long-term downward trend of copper prices on the London Metal Exchange (LME) bottomed-out during 2016. Copper prices realized an upside breakout in Q1 2017 after averaging at US$2.2/lb between Q2 2016 and Q4 2016. In Q4 2016, the LME copper prices averaged US$2.4/lb, reflecting a 10.5 percent increase from the previous quarter (Q3 2016); however, prices averaged US$2.6/lb in Q1 2017 — a 10.6 percent increase from Q4 2016. The y-o-y prices increased by 8.1 percent in Q4 2016 and about 24.9 percent in Q1 2017.

Copper prices rose to a 20-month high in February 2017 at US$2.7/lb, before falling back to US$2.6/lb in March 2017. This increase was a result of supply disruptions at three of the world’s largest mines — Escondida in Chile, Grasberg in Indonesia and Cerro Verde in Peru. Production was negatively impacted by labor strikes at the Chile and Peru mines and copper export restrictions in Indonesia.

During 2016–21, prices are expected to increase at a Compound Annual Growth Rate (CAGR) of 7.8 percent, to reach US$3.2/lb by 2021, from an average price of US$2.2/lb in 2016, driven by strong growth in consumption in China, Europe and the US. In March 2017, China’s Purchase Manufactures Index² (PMI) indicated an expansionary economic environment for eight consecutive months. In the same

Source (s): Import & Export commodities by industry, China Custom Statistics, HKTDC Research, accessed April 2017; IMF Primary Commodity Prices, International Monetary Fund, accessed April 2017; China Imports and Exports of Copper and Aluminum in February 2017, Shanghai Metals Market; accessed April 2017; Metals-London copper hits highest in more than a week, demand hopes underpin, 29 March 2017, CNBC website, as accessed on 11 April 2017; KPMG Analysis

China's Q4 2016 copper imports rose to 1,160 thousand tons (Kt), reflecting a 10.5 percent q-o-q increase from 1,050Kt in Q3 2016. This was due to expansions in the manufacturing sector and an unexpected rebound in the property market from a construction boom, which in turn led to increase in Q1 2017 copper demand in China.

• Global mine production³ increased by 7 percent to reach 20.6 million tons (Mt) in 2016, from 19.2Mt in 2015. This rise in production was led by Peru and Indonesia, while Chile — the world’s largest producer — witnessed a 4 percent y-o-y decline in its production to 3.8Mt, primarily due to lower ore grades. By 2017, production is expected to increase by about 0.3 percent y-o-y to reach 21.2Mt, constrained by supply disruptions in Peru, Chile and Indonesia. These disruptions are forecast to reduce supply by 200,000 tons in the first half of 2017.

• In March 2017, Freeport’s Cerro Verde mine in Peru witnessed disruptions in its operations due to a labor strike over wages and conditions. The strike is estimated to have cost the company 7,000 tons of production each week from 10 March until 30 March 2017. However, production in Peru has expanded rapidly over the past few years and accordingly these disruptions are not likely to significantly impact costs which are expected to remain flat over 2016-2018. Mine expansions at Peru’s Toquepala and Toromochowill mines are expected to result in capacity additions of about 200,000 tons, during 2018 and 2019, respectively.

• On 12 January 2017, the Indonesian Government imposed an export ban on Freeport’s Grasberg mine, to promote the domestic smelting industry and match the lower capacity of the local Gresik refinery in the country. After initial discussions between Freeport and the government, the ban is expected to end in April 2017. The government plans to allocate a temporary export permit, but its execution is uncertain as the operator awaits the final details.

• BHP’s Escondida mine in Chile halted its production on 9 February 2017 as workers went on strike over wages and conditions. The Bureau of Resources & Energy Economics (BREE) estimates that the strike, which ended on 25 March 2017, cost the mine 125,000 tons of copper output. However, Chile is expected to remain the world’s largest producer at least for the next few years, as a result of planned expansions at the Escondida mine, BREE estimated an additional production capacity of just under 1 million tons (Mt) by 2022. Expansions at Sierra Gorda and Spence will also add about 320,000 tons of production capacity by 2020.

• Supply disruptions and higher consumption were not able to lower copper inventories in Q1 2017. Copper stocks at major exchanges, such as the London Mercantile Exchange, Shanghai Futures Exchange and COMEX, increased by 28 percent in the year to mid-March 2017, with an inventory of 800,000 tons.

• Long-term global mine production is projected to increase by 1.8 percent annually to reach 23Mt in 2022. This is expected to be driven by several large-scale mines and planned expansions between 2018 and 2020. Due to the recent change in US leadership, there is a possibility of accelerated operations in the US Black Butte project in Montana, which was previously opposed by an empowered environmental body. This could lead to a reductions in earlier operational challenges faced by this project.

• Global refined production is expected to grow by 2 percent in 2017, driven by capacity expansion projects. Globally, in 2017, 768,000 tons of refining capacity is expected to commence. Out of this, about 76 percent is planned in China. In 2017, expansion at China’s Huludao Hongyue and Qinghai Copper is expected to add 150,000 tons and 135,000 tons of production, respectively.

Source: Aust Gold and Copper: Reporting season wrap — Gold and Copper, Credit Suisse, 1 March 2017; via Thomson Research/ Investext, accessed April 2017; F stands for forecast data; DRC stands for Democratic Republic of Congo; RoW stands for Rest of the World

Source: Aust Gold and Copper: Reporting season wrap — Gold and Copper, Credit Suisse, 1 March 2017; via Thomson Research/ Investext, accessed April 2017; F stands for forecast data

• Global consumption⁴ was estimated to grow by 3.4 percent y-o-y in 2016, reaching 22.5Mt, primarily on the back of the Chinese Government’s investments in the construction sector. Copper consumption in China increased 3 percent in 2016 reaching 11,600 tons. China’s residential construction sector is expected to grow moderately in 2017, due to the government’s measures to moderate the recent residential property market boom. However, the government has planned large investments in the infrastructure sector, which will neutralize the effect of the decline in residential construction demand and boost the overall demand for copper in the coming years.

• Europe’s refined copper consumption increased 4 percent y-o-y in 2016, driven by strong demand in Germany and Russia, which increased their y-o-y consumption by 6.2 percent and 15.2 percent, respectively. This can be attributed to industrial production growth in Europe, supported by data from Eurozone Composite PMI, which reported expansion in recent months, portraying a healthy economic outlook for the short-term. Also, Russia’s manufacturing sector PMI realized a 70-month high of 54.7 in January 2017, up from 53.7 in December 2016, due to quick rates of increased production, complimenting demand for copper.

• US copper consumption witnessed a marginal y-o-y decline of 1 percent to 1.8Mt in 2016. This represents a 40 percent reduction in consumption than the peak achieved in 2000 due to declining manufacturing activities in the US, in preference of the services sector in the US. However, increase in infrastructure investments is expected to boost US copper consumption in 2018 onward.

• Another factor contributing to the increase in global demand is the increase in the global penetration of electric cars, as an average electric car requires 80 to 90 kilograms of copper compared to an estimated 25 kilograms for a conventional passenger car. Growth in SUV sales will also complement the demand for copper in the automotive manufacturing industry, as the size of a SUV is larger than a conventional car and requires more copper.

• Long-term global copper demand is estimated to grow at a CAGR of 2 percent between 2016 and 2019, to reach 23.9Mt by 2019. This is expected to be driven by global investments in energy infrastructure and growing demand in renewable energy technologies. By 2018, stronger industrial production globally, will mean that copper consumption will outpace its production capacity. Major countries responsible for the growth forecasts include China, Vietnam and South Korea. India, which consumes 2 percent of the world copper, is likely to increase its consumption over the medium term on the account of strong economic growth and rising urbanization in the country.

Source(s): Aust Gold and Copper: Reporting season wrap — Gold and Copper, Credit Suisse, 1 March 2017; via Thomson Research/ Investext, accessed April 2017; F stands for forecast data

Source: Capital IQ, consensus prices, accessed April 2017; Aust Gold and Copper: Reporting season wrap — Gold and Copper, Credit Suisse, 1 March 2017; Resources and Energy Quarterly, Bureau of Resources & Energy Economics (BREE), Australian Government, March quarter 2017, accessed April 2017; KPMG Analysis

^*Market balance represents the difference between the supply and demand for refined copper. A positive market balance indicates that the supply is more than the demand, whereas a negative market balance indicates demand exceeding supply. F stands for forecast data

The total value of 10 major deals⁵ announced in Q4 2016 was US$0.1 billion, compared with 12 deals in Q1 2017 valued at US$1.3 billion.

The increase in deal activity in Q1 2017, as compared with Q4 2016, was due to the high-value deal, announced on 5 January 2017 where Glencore Plc agreed to acquire 31 percent of Mutanda Mining SARL’s share capital (a copper and cobalt mining company) for US$0.9 billion.

Source: Mergermarket and Thomson database accessed April 2017

^*Only deals with disclosed value for Q4 2016 and Q1 2017 have been considered

¹ CBNC, China aims for around 6.5 percent economic growth in 2017 accessed April 2017; The State Council The People's Republic of China, World Bank keeps its forecast of China GDP at 6.5% in 2017 accessed April 2017

² Resources and Energy Quarterly, Bureau of Resources & Energy Economics (BREE), Australian Government, March quarter 2017, accessed April 2017; ‘The Purchasing Managers' Index (PMI) is an indicator of the economic health of the manufacturing sector. The PMI is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment’; ‘¬¬The ISM Manufacturing Index’ is based on surveys of more than 300 manufacturing firms by the Institute of Supply Management. The ISM Manufacturing Index monitors employment, production, inventories, new orders and supplier deliveries.’ sourced from Investopedia website, as accessed on 11 April 2017.

³ Resources and Energy Quarterly, Bureau of Resources & Energy Economics (BREE), Australian Government, March quarter 2017; Gold and Copper Sector: Commodities and FX quarterly review, Credit Suisse, 1 March 2017, via Thomson One; accessed April 2017; Workers to end strike at Peru's top copper mine Cerro Verde, 30 March 2017, Reuters website, as accessed on 11 April 2017; Freeport awaits permit to end costly Indonesia export ban: executives, 5 April 2017, Reuters website, as accessed on 11 April 2017

⁴ "Resources and Energy Quarterly", Bureau of Resources & Energy Economics (BREE), Australian Government, March quarter 2016, accessed April 2016

⁵ Mergermarket and Thomson database, accessed April 2017

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