Copper hammered, far from flattened, as it suffers biggest price drop in 2 years

8th December 2017
Resources Rising Stars

Copper took one on the chin, recording its biggest drop in two years in London on Tuesday, but the outlook for the red metal is far from dire, The Australian Financial Review reports.

Benchmark copper closed 4.2 per cent lower at $US6542 per tonne in London, after touching its lowest level since October 5 at $US6533.50. The metal, which is widely used in power systems and construction, fell by the most in one session since July 2015. On the Comex in New York, copper shed 4.5 per cent to $US2.95 a pound — even with the drop it's year-to-date advance is 17.8 per cent.

"Most base metals have come off their highs in recent weeks, particularly copper, nickel and aluminum," said TD Securities commodity strategist Ryan McKay, not unexpectedly.

Nickel slumped 4.6 per cent to $US10,865 a tonne on Tuesday, while benchmark LME aluminium fell 0.8 per cent to $US2052 per tonne. Zinc and lead also finished lower.

The hammering of base metals was linked in part to some strength in the US dollar, which makes commodities priced in the greenback more expensive, in addition to a shift in opinions about China.

"The sentiment in China has turned less positive after the conclusion of the National Party Congress, as the deleveraging rhetoric has returned to the market, especially with regards to real estate speculation," Mr McKay said. "Worries of the deleveraging's impact on real estate and construction demand saw optimism for commodity demand reduced and prices retreat.

"Furthermore, the divergence between China's official manufacturing PMI (which includes large state owned enterprises) and the Caixin manufacturing PMI (which includes smaller private firms) highlights the underlying issues in China. Smaller firms appear to be struggling amid deleveraging and pollution curbs, while the debt-ridden SOEs enjoy preferential treatment from the local governments," Mr McKay also said.

In a 2018 outlook published on Tuesday, as the price was retreating, Bank of America Merrill Lynch said that "there is scope for copper prices to reach $US7700 a tonne (or $US3.50 a pound) by mid-2018".

In a note ahead of copper's overnight drop, Capital Economics tipped that there was a bit too much near-term optimism about demand for the metal.

"The global economy has surprised on the upside this year and we are expecting this momentum to continue into 2018," wrote Caroline Bain, chief commodities economist at Capital Economics. "This is good news for the price of copper as it has a reasonable correlation with growth in global economic activity."

However, Ms Bain said the prices have got ahead of fundamentals: "Bringing all our forecasts together, the market is effectively going to be close to balance in 2018-19, with a small surplus in 2018 and small deficit in 2019."

So where is copper headed? "We expect the price of copper to edge lower over the next six months as optimism about China's demand fades and both mine supply and refined production revive," Ms Bain said.

"The biggest risk to our forecast, we think, is the possibility of significant disruptions to mine supply. However, after falling to $US6250 per tonne in June 2018, we expect the price of copper to pick up on the back of strong growth in new sources of demand, particularly electric vehicles and renewable energy. Prices could reach $US7000 and $US8000 at end-2018 and end-2019 respectively."

In a recent review of top trends for metals and mining in 2018, S&P Global Ratings said it "expects average prices for most of the metals and mining commodities we track to remain broadly flat in 2018 and 2019".

"Prices in the majority of instances have sharply increased through 2017 and prompted multiple upward revisions to our assumptions this year – notably for base metals," the ratings firm said. "Short-to-medium term supply constraints were a key contributor to the rally, but we believe it has largely run its course".

That said, S&P is positive on copper, while cautious on iron ore, coking coal and zinc.

"In certain cases (copper, for example), we expect a looming supply deficit as new production is unable to keep pace with steady demand predominantly from the Asia-Pacific (APAC) region and the US," S&P said. "Given the relatively recent trough in copper prices (2016) and the years required to develop new mines, we expect to see higher prices into 2019.

"Until recently, most producers have not been sufficiently incentivised to invest in new capacity, given high price volatility and uncertainty. Hence, we acknowledge that potential for capex to rebound to above our expectations, which could be influenced by higher than assumed commodity prices.

"Alternatively, we expect a heightened supply response in iron ore, coking coal, and zinc markets (outside of China); the ramp-up of new mines (iron ore) and the potential emergence of previously idled capacity (notably in zinc) are likely drivers of gradually lower prices for these commodities over the next two years."

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