April 4, 2017    7 minute read

The Copper Market is Anything but Rusty

Commodity Analysis    April 4, 2017    7 minute read

The Copper Market is Anything but Rusty

Copper is a commodity that has a crucial role in the world’s economy, yet is not often the main one in terms of focus. Investors tend to move towards precious metals and oil when high levels of uncertainty are present in the capital markets. However, a lot of sectors are dependent on the movement of copper’s price and its’ related industries, like the energy, infrastructure, and transportation industries. The visual overview beneath gives clear insights into the importance of copper in Europe, which can be largely generalised for the global market.This article gives a short-term outlook on the world base metal and global copper commodity market. Interestingly, a significant portion of annual reports of the largest copper-related corporations state China to be their biggest source of demand, with some leaders in the copper market even seeing around 40% of their total copper coming from the country.

A few years ago, the global copper market had a bearish-natured period, and high volatility was present in the market. This was mainly related to China’s slowdown in growth from 7.7% in 2013 to 7.4% in 2014, and a ‘crash’ in oil prices, which plummeted tremendously (75% from mid-2014 to the end of 2015 (the oil commodity is highly correlated to the overall commodities market).

The remainder of this article will zoom in on the global metals market and copper market in more detail. Initially, a short update is given on 2016 and the present. After that, a short-term future outlook is given. Before further reading, it can be said that the global copper market is anything but a rusty one, which could do with a status update.

Global Metals Market Outlook

According to a recently published report from the World Bank, metal prices increased 10% across the last quarter of 2016, taking them to a remarkable three quarters of growth in a row. However, average annual metal prices were down 6% compared to 2015, the lowest level in eleven years.

This downward average trend in metal prices was mainly related to the credit stimulus in China, constraints related to supply, and falling stock prices in the beginning of 2016. Eventually, the capital markets received a boost because of the direction of the US elections. A positive view was developed that, as a candidate and President-elect, Donald Trump had a vital impact on expectations amongst infrastructure providers, which positively impacted the base metal commodity market.

Around November 2016, there was considerable investor demand in China, which even led to higher metal prices, and this even continued into the beginning of the current year. China is aiming for more commodity-intensive infrastructure and construction industries, which is the underlying factor behind the stronger demand from China’s side. The graph below shows the metal and mineral prices from January 2007 until January 2017:

From the graph above, it is clearly that global metal and mineral prices have appreciated from mid-2016 until now. The World Bank also gave an outlook for the coming period, giving a projection of +11% for metal prices in 2017. The main reason for this positive projection is because it is expected that markets are tightened for the majority of the metal types, especially the ones that have some constraints related to it.

The Global Copper Market’s Outlook

The World Bank also gave some crucial facts related to the global copper market. The price of copper increased by 10% over the fourth quarter of 2016, the first time quarterly growth hit double digits in about five years. At that time, global copper inventories were falling and there were expectations that demand would rise. Moreover, new capacity was found in Peru, which was also an underlying factor of the increase in copper prices.

Nevertheless, some uncertainty is present in the market. A considerable growth in terms of supply is expected in the 2017/2018 period; however, one uncertainty arises related to the potential wage negotiation issues that may arise in Chile. This can lead to a decrease in the surplus, since miners and other copper production related workers have to be paid more.

It should be mentioned that Chile is considered to be the most important country in terms of copper generation. Most leading copper firms are present in the country, either on their own or by joining a range of companies on the same mining site (in a joint venture or other cooperation). The following visual representation shows the overall asset lifecycle regarding mining oriented businesses:

Source: KPMG

The asset lifecycle related to the mining industry is known for its long lifecycle. Knowledge, pace, efficiency of operations, and innovation are key elements that lead to success in the sector. However, macroeconomic events have a considerably high impact on the copper commodity price levels, and this risk can only be partly mitigated through buying forwards, futures, swaps, or other hedge related financial instruments.

In the end, a double-digit growth is expected for copper in the short-term period. However, some risks have to be taken into account. Stronger global demand, a slower finalisation of capacity, stricter environmental regulations, and policy issues can all lower supply. Another potential risk is the growth downturn in China (which now represents more than 50% of worldwide consumption). In the following graph the World Bank market forecast of the copper market is given:

The nominal level is expected to slightly rise during the coming years, which indicates great potential for the industry. Currently, the copper 3 months future level – which is a standardised agreed future price contract whereby the contract buyer agrees on a predetermined price 3 months before the specified date – is around $5753 per metric tonne. However, this is expected to increase to over $6000 per metric tonne in the near future.

This is great news for a considerable number of stakeholders. On the other hand, there are still factors that can potentially take things in different directions. The outcome of Trump’s proposed plans, like his tax reform and infrastructure plans, have an impact on the global market. Additionally, trade relations with Asian and South American countries like China and Mexico could potentially slow down global growth if President Trump is able to deliver on his promises to put America first. As mentioned before, slowing demand in China will certainly have a huge impact on the overall copper market. President Trump definitely takes a significant stake in this situation.

Conclusion

The current situation and future outlook for copper are both promising: it seems that darker days have made way for brighter ones. However, close attention should be paid to a number of upcoming reports on the market. The World Bank will publish a new status and outlook report on the global commodities during April 2017. Furthermore, Thomson Reuters will publish its yearly survey on copper during the coming months too.

This yearly survey represents a massive information stream and should be taken into account when considering trading positions in the copper commodity market. Some uncertainties will show their true nature during the coming period. Will Trump’s plans become reality? How are US relations with Asian and South American countries going? What will the impact be of events like wage negotiations in Chile and other crucial counties?

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