Blogs

What’s in store for the reddish-brown metal in 2018?

  • Will copper prices continue the one-way rally?
  • Will positive economic outlook continue to support prices?
  • Are disputes over labour contract renewals expected to disrupt supply in 2018?

 

Copper is believed to have attained a doctorate in economics as a movement in its prices and consumption directly-indirectly reflect the health of the global economy. It is extensively used in all major industries such as infrastructure, construction, automobiles and consumer appliances. Thus, copper is considered as a barometer for broader economic health. However, there were instances where its price performance was primarily driven by factors on the supply side instead of the demand (which signals economic growth). In such cases, copper somewhat defied its doctorate tag. Hence, this can also be considered as an indicator (and not a barometer) of economic health as copper prices do rise or fall for reasons other than economic growth or sluggishness.

Moreover, LME copper prices took a big leap in 2016 and a bigger jump in 2017, these increased by 18% and 29%, respectively after broadly declining for 5 years (2011-15). In 2016, prices were relatively volatile hovering in the range of USD 4,500 to 5,800 per MT and closed the year at USD ~5,500 per MT. In 2017, the prices were even stronger as copper breached USD 7,000 mark and reached a 4-year high closing of USD ~7,250 per MT. A healthy global macroeconomic condition was mainly responsible for an improvement in the copper demand, while the additional boost in the price was provided by supply-side pressures amid disruptions in a number of key mining regions. 

Furthermore, in 2016, the global production of copper increased by 2% vis-à-vis 1% from the previous year. This was driven by investment led growth in China and the overall healthy international economic scenario. Although, the demand marginally decelerated in 2017 owing to slow construction activity in China. However, supply shocks outweighed the moderation in demand and pushed the prices over USD 7,000 levels during the year. 

The industry was in a deficit for most quarters in 2016-17. Further, in 2016, the shortfall was primarily because of a higher demand (more than 2%) as compared to supply (1%). On the other hand, there was a ~10% decline in copper mined supply and ~7% fall in global refined supply, this generated a deficit of 118 kt in 2017. 

In addition, a major part of the year (2017) saw pay disputes, change in labour reforms, proposed layoffs and production at several copper mines was halted. Escondida, which is the world’s largest copper mine based in Chile witnessed the longest strike of 43 days. Similarly, Grasberg mine in Indonesia, which is the world’s second-largest mine ceased production for more than a month. In addition, BHP Billiton Plc’s and Glencore Plc’s Antamina, Freeport-McMoRan Inc’s Cerro Verde and Southern Copper Corp’s Cuajone and Toquepala also stopped production in 2017. These strikes led to a decline of more than 2% of the total mined production (2017).

The above factors resulted in a price jump and acted as a boon for the copper players as their share prices surged significantly in the second half of 2017. The stock prices for the major players, namely Freeport, BHP Billiton, Southern Copper and Glencore saw a rise of more than 50% between 2015-17. 

Along with stock price, copper price increase impacted the company revenues, which reported an increase of more than 20% in each quarter (2017), this was in spite of a decline in total production. In 2017, mined copper production dipped considerably for all the key players, particularly in Q1. A 36% decline for BHP Billiton was propelled by 43 days of strike in Escondida mine. Similarly, Freeport operated Grasberg mine in Indonesia also halted operations for more than 10 weeks and this led to more than 20% dip in its production in H1 2017.

In the current year, the global macroeconomic outlook seems positive for most of the major developed as well as developing nations. This is expected to translate into a high copper demand, which would not only arise from China but from the other parts of the world. In the past few years, China has been the primary growth driver for copper (and other metals). The U.S. economy is also anticipated to grow beyond 2.5% in 2018. The emerging economies are also projected to grow at a reasonable rate and thus, all these developments would add to the total demand for copper.  

Addedly, apart from the conventional growth, the evolution of Electric Vehicles (EVs) and their use is another area which could create an incremental demand for copper from 2018 onwards. EVs are projected to occupy 35% chunk of the new motor vehicle sales by 2040. In 2017, 1.2 million EVs were registered, this was an increase of 57% from the preceding year. Though currently, the number of EVs is very low as compared to the overall automobiles base, its growth is anticipated at a brisk pace. EVs require four times the copper than the gas-powered vehicles (60-90 kg of copper is needed to make each new EV as against 23 kg for a gasoline-powered vehicle). Hence, this small number is also likely to add to the copper demand.

In conclusion, it can be stated that 2018 would continue to experience supply disruptions. There are several labour contracts that are up for renewal in the year. Approximately, 30 contracts are expiring and most of these will be renewed in Chile and Peru, which control a total ~5 million tons of copper supply (23% of the total global supply). Further, based on past (2017) experiences, the negotiations are unlikely to be smooth this year. Though supply cuts are not anticipated to be as intense as these were in 2017, however, the industry is expected to face a deficit again. Thus, in totality, it can be affirmed that a healthy economic scenario and a prospect of continuous supply disruptions would support the prices in 2018 as well. Although, the fact is that copper followed a one-way rally for almost 2 years now, price rise may not be as intense in the upcoming quarters. Broadly copper prices are expected to continue a high trajectory, though a moderate set of intermittent correction after a strong rally in the past few quarters along with cues on labour supply contracts might create few mercurial movements for the commodity in 2018.

Your Rating

Used car market in India, online start-ups organising the sector

Per capita car ownership is low as compared to other developed nations and the global average Used cars were not a preferred means of ownership due to lack of trust among buyers and...

Unnoticed growth of the media and entertainment industry in India

Overall industry brief Growth of the M&E industry and its segments Major supporting elements of this growth   Media and Entertainment (M&E) is a very wide industry...

Can PepsiCo turnaround the performance of its North American beverage segment?

What led to the consistent decline of PepsiCo’s trademark drinks in the last few years? Can the recent improvement in top-line numbers for PepsiCo’s beverage segment be maintained in...

Analysing the price behaviour of the volatile cryptocurrency market

A brief introduction on the types of cryptocurrencies Reasons for the spike in 2017 and the slump in 2018 Is cryptocurrency a bubble?   On November 15, 2018, the...

Sri Lankan economic and political crisis

Sri Lanka’s latest political crisis, who governs the nation? Poor economic indicators adding to the nation’s woes   Sri Lanka is currently embroiled in a political crisis,...

Failure of Amazon in China, an analysis

E-commerce market in China Online consumer product retailers in China Performance of Amazon in China   Amazon is a global e-commerce player selling a wide...

Network densification and data speed in India, are HetNet and small cells a solution?

Worldwide data speed, where does India stand? Reasons for slow internet speed and status of the Indian telecom tower infrastructure How small cells fulfil data speed requirement...

SAP’s acquisition of Qualtrics, a costly affair or a strategic move?

History and evolution of SAP and ERP. Will experience measurement add value to SAP ERP?   On November 12, 2018 ERP software giant SAP announced an $8 billion acquisition...

An analysis of Malaysian rubber glove industry

How big is the international rubber gloves market? Reasons behind the healthy and steady growth Malaysia’s role in the industry Why are companies struggling for stable...

Battle of the Low-Cost Carriers

The aviation industry has witnessed a mammoth growth in the last decade. IATA or the International Air Transport Association reported that revenues in the sector increased to $746 billion (2014)...

E-wallets dominate China, an analysis of the trend

E-Wallets: meaning and classification Widespread acceptance of e-wallets in China Comparison of PayPal, WeChat and Alipay on the operational parameters   E-wallets...

Coca-Cola remains a popular brand despite changing consumer preferences

Rising health concerns have triggered the global sugar war How is Coca-Cola surviving in the war? What makes Coca-Cola a popular company among consumers as well as in the equity...

Global jewellery retail industry and the growth of jewellery retail chains

  The annual global jewellery retail sales have grown at a CAGR of around 5% from USD 146 billion in 2005, this is expected to reach USD 250 billion in 2017. The top 5 regions for the...

Recovery still far away in the global graphite electrode manufacturing industry

The graphite electrodes find application mainly in the steel manufacturing through Electric Arc Furnace (EAF) route. EAF steel is mainly produced in EAFs by melting steel scrap through the...

A study of moissanite jewellery industry and its global market

Moissanite is used as an alternative to diamond jewellery. It is regarded at par with the diamond when compared on the basis of quality and physical properties. Moreover, moissanite glitter more...

Housing finance market in India. Is affordable housing driving the growth?

Overview of the housing finance sector in India Key players dominating the segment and their dynamics Factors driving aggressive demand for housing   The housing...

Is the radio broadcasting industry in the U.S. dying? An analysis

Radio, the most powerful medium of reach in the U.S. Why the industry is moving at a slow pace? Radio’s health is still sound, will it continue in the long-term?   ...

Tire manufacturing industry, analysing the cost and margin trends

The global market for tire manufacturing stands at $180 billion. Michelin anticipates the long-term demand to rise at the rate of 5 to 10% a year in developing markets and 1 to 2% a year in mature...

Big and small banks, is size, the key? Elucidated through key benchmarks

The banking industry has undergone a tremendous amount of change in the past 8 years as a result of the 2008 financial crisis. During this period, many small and large banks performed badly,...

Flying vehicles, could it be a reality?

Flying vehicles and potential advantages Companies involved in the manufacturing of flying vehicles Challenges faced by developers in the development and adoption of flying...