On balance, 2017 has been a standout year for copper, with prices enjoying gains of nearly 25% during the year.
On balance, 2017 has been a standout year for copper, with prices enjoying gains of nearly 25% during the year. At times, investor sentiment pushed prices higher than what could be justified by fundamentals but prices moderated somewhat during Q4. Concerns over a slowdown in Chinese demand coupled with a strengthening USD eroded some of these gains.
Early indications are that the market will swing into a deficit (undersupply) position in early 2019 but there is the potentially for this to occur earlier, meaning that copper prices should continue their upward trend in 2018 but this time in a more sustained manner. Whilst all eyes will continue to be on China's infrastructure and real estate sectors for signs of sustained growth, the supply equation will be equally important.
2018 will see an unusually higher number of labor contracts come up for renewal which could further tighten the market. Over 30 Chilean mines will negotiate worker contracts with unions next year. This represents about three-quarters of the country's copper output, or about one-fifth of world production. Peruvian mines could also be affected, with workers at Cerro Verde and Southern Peru's Cuajone and Toquepala mines also due to negotiate labor contracts in 2018. Whilst fears of significant supply disruptions have not necessarily materialized in the past, operators will be looking to secure production by agreeing contracts up front.
Assuming Chinese demand continues at current rates and supply tightens, optimism over 2018 will be well founded. Prices should average above the US$3.0/lb mark in the second half of 2018.
Copper prices on the London Metal Exchange (LME) averaged US$2.7/lb in Q1 2017, a 25 percent y-o-y increase. This was primarily driven by supply disruptions at three of the world's largest mines -- Escondida in Chile and Cerro Verde in Peru due to labor issues and at Grasberg in Indonesia due to copper export restrictions.
In Q2 2017, copper prices fell to US$2.6/lb, a 3 percent q-o-q decline due to unfavorable growth data from China and higher inventory levels.
In Q3 2017, prices rebounded and averaged US$2.9/lb, a 12.1 percent q-o-q increase, driven by optimism over a recovery in estimated copper consumption from China. This was fuelled by the Producers Manufacturing Index (PMI) rating in August 2017 (51.7), beating Bloomberg's forecast of 51.3 and topping July's PMI of 51.3. PMI is an indicator of economic health for the manufacturing sector, thus impacting base metals demand. A PMI of more than 50 represents expansion in the manufacturing sector when compared with base period. The price increase was also supported by a weaker US dollar and industrial action in Chile and Peru -- two of the largest copper producers. Copper prices rose to a two-year high in mid-August 2017, over US$3/lb, as a result of investor anxiety over the potential ban on Chinese imports of scrap metal from the end of 2018, which may lead to higher imports of refined copper and concentrates.
The upward trend in prices slowed in Q4 2017, but recovered somewhat in early December, to reach US$3.2/lb on 21 December 2017.
During 2018 -2020, prices are expected to increase at a Compound Annual Growth Rate (CAGR) of 2.2 percent, exceeding US$3/lb by 2020, from an estimated average price of US$2.9/lb in 2018. Prices are expected to further increase during 2019 and reach up-to US$3.04/lb in 2020, when it is anticipated that consumption will significantly outpace mine supply.
Source (s): IMF Primary Commodity Prices, International Monetary Fund, accessed November 2017; China Imports and Exports of Copper and Aluminum updates: March–May 2017, Shanghai Metals Market, accessed November 2017; UPDATE 2-China Sept copper imports hit highest since March, aluminum exports fall, Reuters website, accessed November 2017; Copper: Monthly Average Settlement Price, July–September 2017, LME website, accessed November 2017.
China's Q3 2017 imports rose to 1,210 thousand tons (Kt), reflecting a 15.2 percent y-o-y increase from 1,050Kt in Q3 2016, driven by steady demand from China’s infrastructure sector and positive PMI ratings.
Note: F stands for forecast data; DRC stands for Democratic Republic of Congo; RoW stands for Rest of the World.
Source: Copper Forecasts, Credit Suisse, 24 October 2017; via Thomson One, accessed November 2017.
Note: F stands for forecast data; DRC stands for Democratic Republic of Congo; RoW stands for Rest of the World.
Source: Copper Forecasts, Credit Suisse, 24 October 2017; via Thomson One, accessed November 2017.
Note: F stands for forecast data; DRC stands for Democratic Republic of Congo; RoW stands for Rest of the World.
Source: Copper Forecasts, Credit Suisse, 24 October 2017; via Thomson One, accessed November 2017.
Source: Capital IQ, consensus prices, accessed November 2017; Copper Forecasts, Credit Suisse, 24 October 2017; via Thomson One, accessed November 2017.
*Market balance represents the difference between the supply of 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 deals announced in Q2 2017 was US$0.08 billion, compared with 12 deals in Q3 2017, valued at US$0.15 billion. In Q4 2017 (YTD*), a total of 14 deals were announced, with a total value of US$2.7 billion.
In Q4 2017, First Quantum Minerals Ltd was granted an option to acquire a 50 percent stake in Pebble LP — an Anchorage-based copper and gold mining company, from Northern Dynasty Minerals Ltd, for US$1.5 billion. This deal was announced on 18 December 2017.
Source: Mergermarket and Thomson database accessed December 2017
*Only deals with disclosed value for Q2 2017, Q3 2017 and Q4 2017 ( till 21 December 2017) have been considered
Price outlook: Resources and Energy Quarterly, Bureau of Resources & Energy Economics (BREE), Australian Government, June quarter, September quarter 2017, accessed November 2017; METALS-London copper hits 2-year high on outlook that China may ban scrap imports, 26 July 2017, Reuters website, as accessed in November 2017; Aus gold, copper, nickel & zinc, 2 November 2017; Australia & NZ, 25 October 2017; Copper Forecasts, 24 October 2017 -- Credit Suisse, sourced via Thomson One, accessed in November 2017; Mighty Month for Metals Sees Best Gains in Years on Rates, China, 1 September 2017, Bloomberg website, accessed in November 2017; Copper streaming Chart, 21 December 2017, Investing website, as accessed on 21 December 2017.
Figure 1: Source (s): IMF Primary Commodity Prices, International Monetary Fund, http://www.imf.org/external/np/res/commod/index.aspx, accessed November 2017; China Imports and Exports of Copper and Aluminum updates: March -May 2017, Shanghai Metals Market, accessed November 2017; UPDATE 2-China Sept copper imports hit highest since March, aluminum exports fall, https://af.reuters.com/article/commoditiesNews/idAFL4N1MO1N7, Reuters website, accessed November 2017; Copper: Monthly Average Settlement Price, July -September 2017, https://www.lme.com/Market-Data/Reports-and-data/Monthly-averages, LME website, accessed November 2017.
Supply: Resources and Energy Quarterly, Bureau of Resources & Energy Economics (BREE), Australian Government, June quarter, September quarter 2017, accessed November 2017;Aus gold, copper, nickel & zinc, 2 November 2017; Australia & NZ, 25 October 2017; Copper Forecasts, 24 October 2017 -- Credit Suisse, sourced via Thomson One, accessed in November 2017; Copper price update: Supply dynamics, 9 October 2017, Investing News website, accessed in November 2017; Copper Mail No. 149, 30 June 2017, Aurubis website, as accessed on 21 December 2017.
Demand: Resources and Energy Quarterly, Bureau of Resources & Energy Economics (BREE), Australian Government, June quarter, September quarter 2017, accessed November 2017;Aus gold, copper, nickel & zinc, 2 November 2017; Australia & NZ, 25 October 2017; Copper Forecasts, 24 October 2017 -- Credit Suisse, sourced via Thomson One, accessed in November 2017; Secondary production shores up refined copper market, 25 September 2017, Recycling International website, as accessed on 21 December 2017.
Ownership changes: Mergermarket and Thomson database, accessed December 2017.
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