Massive Downside for Copper Prices
Copper prices may recover, but certainly not this year. Demand from China is the main arbiter of copper prices. Now, that demand is slowing. This has had serious consequences on metals prices. The industry sector is preparing for the worst.
Major institutions, from Barclays to Goldman Sachs, have predicted copper prices will drop further because of a surge in extraction prompted by hopes of a demand surge from China that failed to materialize. (Source: “Barclays warns oil and copper prices could fall as much as 25%,” International Business Times, March 29, 2016.)
This has created excess supply, yet copper producers prefer to be optimistic. They have focused on cutting costs in order to derive some financial benefits. The price of copper now hovers around $4,770 per metric ton (tonne). The collapse of crude oil prices and a weakening of local currencies have allowed companies to maintain operations. CODELCO, one of the world’s main copper producers, suggests that Chinese demand will grow again—but not until 2018. (Source: “Copper on Worst Run in Two Years as Barclays Sees Deterioration,” Bloomberg, April 3, 2016.)
But few share the bullish trend in copper prices. Barclays suggests that in the absence of any real improvement in fundamentals, it will be difficult for the favorable trend to continue into the second quarter. (Source: “Oil, copper at risk of 25% slump on ‘rush for the exits,’ Barclays warns,” MarketWatch, March 30, 2016.)
According to Barclays, commodity prices started to increase in March on purely speculative grounds. There was no real economic demand. (Source: Ibid.) Copper prices were about $5,260 per tonne last fall. They dropped to the present $4,760 and could go down to $4,000 this year. (Source: Ibid.) The risk is of an actual copper price collapse. This could happen if investors decide to liquidate their copper positions quickly, prompting a bearish stampede and a collapse in the price level.
The raw material’s bullish trend reversal at the start of 2016 has deceived investors. Now, the proverbial cows—the commodity investor ones—are charging home.
Indeed, copper prices are especially vulnerable to volatility. Investors should be concerned that the economy still lacks a sustainable basis for a solid recovery.
China may be continuing to import high volumes of raw materials. But it is doing so at lower prices, exploiting them for the time being. Even Capital Economics, one of the most bullish of the bulls, predicted copper going to $7,000 per tonne by the end of 2016, but has revised that price downward by some $1,400 already. (Source: “Copper price to rally on supply disruptions: Capital Economics,” Mineweb, September 22, 2015)