Copper futures for December delivery turned decidedly bullish on Tuesday, moving up to $2.4208 a pound, which amounts to approximately $5,350.00 per tonne. (Source: Mining, last accessed September 17, 2015.)
This relief could not have come any sooner. The copper price took a heavy beating as a result of the fallout from the Chinese stock market crash in June and July.
Copper prices almost hit an eight-week high last Friday after a hellish week of volatile commodity trading which saw the price lift by six percent. (Source: NASDAQ, last accessed September 17, 2015.) Recovery for the red metal seems to be on the horizon, as prices are digging themselves out of a six-year low in late August. They are still down about 13% year on year, following a 16% nosedive in 2014.
This latest copper price rebound was sparked by a production cut report by Glencore PLC (OTC:GLNCY), the fourth-largest copper producer in the world. This is a significant development because it follows on the heels of Freeport-McMorRan Inc.’s (NYSE:FCX) announcement that it’s idling two of its American mines and slashing copper production in half at its Chilean El Abra mine. (Source: Reuters, last accessed September 17, 2015.)
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State-owned Chilean copper giant Codelco has also committed to cutting production levels and costs, which includes downsizing investments and curbing expansion.
A recent research report by Citigroup forecasts both copper production cuts and disruptions to mining activities. (Source: Bloomberg, last accessed September 17, 2015.) More than one and a half million tonnes have been lost so far in 2015 due to flooding and labor strikes. (Source: Reuters, last accessed September 17, 2015.)
Citigroup’s analysts have calculated that copper output will amount to 18.9 million tonnes this year, which will equal a modest surplus. (Source: Bloomberg, last accessed September 17, 2015.) But the broader market will shift back to a 284,000 tonne deficit by 2016, which will continue through to 2019. Citigroup’s copper price forecast for the fourth quarter of 2015 stands at $5,700.00 per tonne.
Other issues that might provide uplift for copper prices are declining grades and impure concentrate at the largest mining sites. The levels of antimony, arsenic, and bismuth have inched upward in copper alloys in recent years, indicating the declining grade of copper.
Citigroup also looked at the effects that weak local currencies have on the copper sector, concluding that savings from a surging U.S. dollar have not helped foreign producers as much as expected.
The Citigroup report concluded that supply constraints have played the most critical role in defining commodity price cycles in the last two decades, and this latest one is no exception. (Source: Bloomberg, last accessed September 17, 2015.) The copper industry cannot react quickly enough to address a looming supply contraction, which is more than likely to produce a copper price spike.