- 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.