Oversupply Could Crimp Copper Prices
Copper prices are a general indicator of economic performance. Are they going higher or lower?
Commodities have been one of the best asset classes since the start of the year. The overall S&P GSCI (once known as the Goldman Sachs Commodity Index), a benchmark tradable index for investment in the commodity markets, has dropped slightly since the end of 2015. (Source: “Commodity bulls twisting in the wind,” mining.com, March 23, 2016.) Yet some raw materials have stood out for their unexpected bullish performance.
One of these was West Texas Intermediate (WTI) oil, which rose by 6.7%. Gold and silver have jolted, recovering 15% and 10%, respectively. Copper was the other star performer, even if it gained a modest 4.4%.
Copper prices were about $5,260/tonne last fall. They dropped to $4,800 per tonne by the end of 2015. Given that copper is just below $5,000/tonne now, the prediction is for about $5,500/tonne. In contrast, Capital Economics believes that copper will increase a further 10% from the current price by the end of 2016. (Source: Ibid.)
The bullish trend in copper prices, however, may be interrupted abruptly, according to Barclays. (Source: “Oil, copper at risk of 25% slump on ‘rush for the exits,’ Barclays warns,” MarketWatch, March 30, 2016.) The famous bank’s analysts suggest that in the absence of any real improvement in fundamentals, it will be difficult for the favorable trend to continue into the second quarter.
Copper prices are vulnerable to volatility in the second quarter and prices could lose their recent gains. Investors could decide to liquidate their exposure to risk quickly, all at once sinking prices. The main concern is that the fundamentals for a sustainable recovery in copper prices have not yet materialized. China’s economic growth is the main factor to consider. It is the perception of low demand that fuels bearish speculators.
The perception of low demand owes to the fact that while China continues to import high volumes of raw materials, it is doing so at lower prices. Considering volume, rather than value, in September, China imported considerable amounts of oil, metals, and agricultural products even if the commodities markets ignored this fact.
What is clear is that there is great uncertainty surrounding this commodity. So what factors could push copper up or down in the short and medium term?
Glencore, the world’s top copper producer, shut down production at its Katanga mine in the Democratic Republic of Congo (DRC) for an 18-month period last September. The plan was to remove some 400,000 tons of copper from the world market to boost prices. In addition, as reported by Reuters, Newmont Mining will no longer export copper from its mines in Indonesia due to the non-renewal of export licenses.
Ultimately, copper prices depend most on whether Chinese import data figures are correct. So far, the copper bulls have been half right. They predicted a shortage of copper in 2016 and prices have actually increased. But they have not increased substantially as the fundamentals do not warrant long-term optimism yet. Capital Economics, leader of the bulls, had predicted copper going to of $7,000 per tonne by the end of 2016. They revised that price downward, by some $1,400 already. (Source: “Copper price to rally on supply disruptions: Capital Economics,” Mineweb, September 22, 2015.)