May 4, 2017    5 minute read

Copper Futures and the Importance of the Chinese Market

Market Outlook    May 4, 2017    5 minute read

Copper Futures and the Importance of the Chinese Market

Recently, the World Bank published its Commodity Markets Outlook quarterly report. The institution highlighted that prices for most industrial metals gained strength throughout the first quarter of 2017. Furthermore, it expects copper prices to increase considerably during the remainder of 2017. In short, it can be stated that the World Bank is quite optimistic about the outlook of copper prices.

However, Chinese developments are crucial for the future price movements of copper. China is known for its major stake in the global copper commodity market, as the country accounts for around half of the total market in terms of demand. This article gives an update on the copper commodity market, in which quite a few major developments are ongoing.

The World Bank Quarterly Review

In the latest Commodity Markets Outlook quarterly report, the World Bank estimates that copper prices will surge by 18% in 2017. The underlying catalysts for this upward prediction are the various disruptions at the supply side of the curve. The world’s largest mines have had to cope with constraints in operations: for example, Chilean mine workers recently went on major labour strikes. In total, there was a 43-day strike at Escondida, which is the world’s largest copper mine. This strike ended without resolution in the end of March 2017.

Furthermore, the Indonesian government implemented export policy restrictions in January 2017 that included the implementation of rules, which put restrictions on copper exports in order to give a boost to its’ inland refinery production. Consequently, production at Grasberg, which is the world’s second largest-mine, was stopped.

Lastly, there was a flood in Peru, which is the world’s second largest copper producer. This natural disaster had also a negative impact on production output. All these disruptions are a positive sign for copper future prices, because supply is in a downward trend. The following graph presents the copper future price developments throughout recent months:

From the above graph, it can be seen that copper future prices went through a positive first quarter so far this year. Copper prices jumped by 11% in Q1 2017. However, the report also mentions some downside risks that should be taken into consideration when taking an investment position in copper. As mentioned before, China takes a significant position in the market. A slowdown in terms of demand would result in a downward trend for copper future prices. Furthermore, an increase in terms of supply is also a pessimistic catalyst that drags the market to lower levels. From recent news, it seems that some downward risks are heading to the surface.

Copper Mine Producers and China

A recent piece in the FT argues that investors should be less optimistic about the copper prices and the remainder of 2017, due to the impact that policy makers in Beijing could have on demand for the metal. The recent period was a promising one for prices, as the supply side story included disruptions in terms of production. The FTSE All Share Mining Index doubled in the space of less than a year. However, it seems there might be an end to this success story, as the index went down by 13% during the last couple of weeks, as can be seen from the graph below:

Some investment banks are quite concerned about the short-term outlook on copper prices. The optimistic price forecasts on copper and the related producers were slightly revised. Goldman Sachs, which is one of the most crucial banks when it comes to the commodities market, said the following in a recent statement:

“What’s important for commodities is the direction of growth and we believe that is likely to go down.”

The main reason behind this statement is that Goldman is worried about potential tightening of monetary policy in Beijing. In addition, the effect of some monetary policy revisions is already present in the market, since the costs of short-term lending moved to its highest level in two years. Consequently, Beijing is turning its focus to credit growth in order to prevent runaway borrowing.

Furthermore, it has to be mentioned that the Chinese housing market is crucial for global copper demand. Approximately 50% from Chinese copper demand finds its origins in the housing market. As a result of the upward trend in short-term borrowing, conditions in the Chinese housing market are changing, which cause demand to move downwards, and this will have serious consequences for the copper future price.

Copper Futures and the Dragon

In the end, copper prices are undergoing some downward pressure that is mainly related to policy revisions in Beijing. The short-term costs of borrowing presented the highest level in two years, which had a negative impact on the Chinese housing sector. The Chinese housing sector takes around 50% of the total copper demand coming from the dragon.

Furthermore, supply disruptions have come to a close in Chile and Indonesia, which will potentially have a negative impact on copper futures prices. In terms of the supply and demand curve, demand is in a downward trend and supply is in an upward trend, which are the underlying catalysts for the copper futures prices to move to a lower position. Will the Chinese dragon take copper futures prices to a downward trend, just like it did in 2015?

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