Not long ago, Dr. Copper was sick. Today the doctor is looking a lot healthier.
It’s been a rough few years for copper. Since hitting all-time highs of US$10,250/metric tonne in February 2011, it has suffered nearly 6 years of tumbling prices. As shown in the graph below, copper fell 58 percent from its all-time highs to its lows in January 2016. But in the last year, the industrial metal’s fortunes have begun to reverse. Last year copper was up 17.4 percent, and in 2017 so far it’s up 8 percent to nearly $6,000/mT. It’s up 40 percent increase from its lows in January 2016.
Making copper pricey again
The election of Donald Trump brought with it bullish sentiment for Dr. Copper (so called because the price of copper reflects health of the global economy). Many commodities have responded positively since the election in the “Trump rally” – that is, that the new US president will follow through on campaign promises to cut taxes, increase spending, and bolster economic growth.
Copper is one of the most widely used metals in the power, manufacturing and construction sectors, and it’s especially sensitive to changes in economic growth. The price of copper rose by 12 percent during the three weeks following the U.S. elections in November. This rally has continued throughout 2017 so far. Copper is currently trading at levels not seen since May 2015.
But the biggest question now is whether copper’s recovery will continue. It looks like it will.
Mine protests and government regulation will reduce global supply
Disruptions in the supply of copper are boosting copper prices. Major mines around the world are facing challenges that could severely hamper production.
For starters, workers seeking higher wages went on strike on February 9 at Chile’s Minera Escondida – the world’s biggest copper mine, which accounts for 5 percent of the metal’s annual global mine output.
The mine announced it would be stopping production during the strike. Majority owner BHP Billiton announced two days into the strike that it would not be able to meet its imminent contractual requirements of metal shipments. And a quick resolution of the strike – during which the mine isn’t producing copper – is unlikely. (Previous Escondida strikes in 2006 and 2011 lasted 25 and 15 days, respectively.)
Meanwhile, U.S. mining giant Freeport-McMoRan announced it has halted production of copper concentrate at its Grasberg mine (the world’s second-largest copper mine) in Indonesia, due to a measure imposed by the country to reduce exports. The Indonesian government says that it’s issued a permit to allow Freeport to continue production, but the company says that no agreement has been reached.
Also, protests at Peru’s Las Bambas mine – which accounted for 1.8 percent of global mine production last year – could cut global supply further. Previous protests led to suspended shipments of copper from the mine, and this could happen again.
Altogether, a combined 1.7 million tonnes of production is at risk from the outages, or approximately 8 percent of global refined copper supply. And with an estimated one-fifth of the world’s mine capacity facing contract renewals this year, these mine issues could have major implications for the rest of the industry.
Declining copper ore grades push prices higher
In addition to these man-made shortages, declining copper ore grades in Chile will boost copper prices in coming years.
Since the highest-quality copper is generally mined first, mining companies in Chile – which have been worked on for many years – are now increasingly taking lower-quality copper ore out of the ground. Between 2009 and 2014, Chilean copper ore grades declined by an estimated 11.4 percent, while global copper grades declined by 8.4 percent. New production projects are becoming more complex, which reduced production and boosts costs.
Lower ore quality hurts profitability. One result will be cost reductions and supply cuts, which in turn will bolster prices.
China holds the key to rising copper demand
On the demand side, the picture coming from the US is decidedly bullish. U.S. President Donald Trump’s US$500 billion infrastructure plans will boost demand and the price of copper.
The US only accounts for about 8 percent of global copper demand, though. China accounts for almost half of global copper demand – so China’s future economic health will determine the price of copper, as we’ve previously highlighted.
China’s consumption of refined copper rose by 7 percent last year, thanks to renewed demand for power cables, computer appliances and magnet wiring. Despite continued fears that China’s economic growth is slowing, it has remained strong, rising by 6.8 percent in the fourth quarter of 2016. That’s good for the price of copper. More recent strong economic data also supports that view. And in the bigger picture, continued investment in infrastructure will support copper demand.
Indeed, the most recent three weeks have seen near-record long positions for copper, according to a report from the Commodity Futures and Trading Commission, an organisation that records the futures trading positions for major commodities including copper. Long positions indicate that the majority of speculators and large traders believe that copper prices will rise. Speculative copper positions have remained “net bullish” for fifteen consecutive weeks, having turned to the long side on November 1, one week before Trump’s election victory.
A copper deficit looms
Projections across the board predict a copper deficit, that is, demand for copper will outweigh supply in the coming years. BMI Research, a global economic and financial research firm, expects the market to move into deficit by 2019. The research agency expects demand growth to outpace decelerating production growth this year and next year, specifically citing declining ore grades as a key reason for slowing supply. And that will exert upward pressure on prices.
And BHP suggested in its recent annual report that a deficit will soon emerge. The report said: “As [ore] grade declines, a rise in costs and a scarcity of high-quality future development opportunities are likely to constrain the industry’s ability to cheaply meet…demand growth”.
If these projections materialise, prices will skyrocket.
If you’re interested in adding copper to your portfolio, the easiest way to invest in copper is through an exchange-traded fund (ETF). One easy way is the iPath Bloomberg Copper Subindex Total Return (symbol: JJC), which trades on the New York Stock Exchange.