After commencing the year at a 6-year low, it appears that copper prices have hit a floor. A weaker US dollar, supply disruptions and opportunistic restocking by China have all contributed to improved investor sentiment.
However, this is not to say that prices will recover completely. Far from it. It is likely that the rebound experienced in the first quarter of 2016, where copper prices increased by approximately 14% from a low of US$1.95/lb in January 2016, will be short-lived. Sustained price growth will be difficult to maintain in an environment of oversupply and growth uncertainty.
Sustained price growth will be difficult to maintain in an environment of oversupply and growth uncertainty. While China´s official manufacturing Purchasing Managers´ Index (PMI) for March came in at 50.2 (indicating expansion), it is too early to conclude that manufacturing activity has fully recovered. After all, it is the first time it has been above 50 in eight months. It is also unclear how much inventory has been stockpiled in Chinese warehouses. Inventory levels in the Shanghai Futures Exchange reached record highs in March. This seems to suggest that Chinese copper imports are rising but aren’t necessarily backed by user demand. From a supply perspective, world mine production should continue to grow over the short term. Peru is leading the charge with a number of new projects either being completed or increasing production at existing mines. While the market should tighten in 2017, it is not expected to return to a deficit until 2019. This means that prices will remain at current levels for the shot to medium term. The volatility should subside by the second half of 2019, when prices should begin to show a sustained recovery.
In Q1 2016 the London Metal Exchange (LME) copper price was estimated1 to average around US$2.06/lb, 22 percent lower than Q1 2015. Average copper prices are forecast to decline by 10.8 percent to US$2.23/lb in 2016 from an average price of US$2.50/lb in 2015. Prices have fallen as a result of a decline in consumption and an increase in production, which contributed to a build-up of stocks on both the LME and the Shanghai Futures Exchange. Demand growth in China, which accounts for around half of global consumption, slowed to its lowest level since the Global Financial Crisis. Europe’s copper consumption also declined significantly. Production was supported by a combination of new project completions and increased output at existing mines, mainly in South America and Asia.
Over 2015–2019, prices are expected to increase at a CAGR of just 1 percent, to reach US$2.70/lb in 2019, from US$2.57/lb in 2015. Consumption growth is forecast to remain subdued as global and emerging economy growth recovers from a six-year low. Production is forecast to continue expanding steadily as a number of large projects currently in commissioning will reach full production. These projects were approved and commenced construction during the period of high prices in 2011–12.
1 Resources and Energy Quarterly”, Bureau of Resources & Energy Economics (BREE), Australian Government, March quarter 2016, accessed April 2016
Sources: Import & Export commodities by industry, China Custom Statistics, HKTDC Research, accessed April 2016; IMF Primary Commodity Prices, International Monetary Fund, accessed April 2016; China Imports and Exports of Copper and Aluminum in March 2016, Shanghai Metals Market; accessed April 2016; KPMG Analysis
Source: Capital IQ, consensus prices, accessed April 2016; BMO Capital Markets, the Copper Wire - Weekly Copper Market Update, 4 April 2016; Resources and Energy Quarterly”, Bureau of Resources & Energy Economics (BREE), Australian Government, March quarter 2016, accessed April 2016; KPMG Analysis
*Market balance represents the difference between the supply and demand for refined copper. A positive market balance indicates that the supply is more than the demand, whereas a negative market balance indicates demand exceeding supply. F stands for forecast data
2 Resources and Energy Quarterly”, Bureau of Resources & Energy Economics (BREE), Australian Government, March quarter 2016, accessed April 2016
Source: RBC Capital Markets, Metal Prospects – Copper Market Outlook – First Quarter 2016; via Thomson Research/ Investext, accessed March 2016; F stands for forecast data
Source: RBC Capital Markets, Metal Prospects – Copper Market Outlook – First Quarter 2016; via Thomson Research/ Investext, accessed March 2016
3 Resources and Energy Quarterly”, Bureau of Resources & Energy Economics (BREE), Australian Government, March quarter 2016, accessed April 2016
Source: RBC Capital Markets, Metal Prospects – Copper Market Outlook – First Quarter 2016; via Thomson Research/ Investext, accessed April 2016
The total value of ten major deals announced in Q1 2016 was US$3.5 billion, compared to eight deals in Q4 2015 valued at US$1.8 billion.
The largest deal was announced on 14 January 2016, wherein an investor group comprised of Aneka Tambang and Indonesia Asahan Aluminium agreed to acquire a 10.64 percent stake in Freeport Indonesia, a Jakarta-based copper and nickel ore mine operator, a unit of Freeport-McMoRan, for US$1.7 billion.
4 Mergermarket and Thomson database, accessed April 2016
Source: Mergermarket and Thomson database accessed April 2016
Deals with transaction value > US$2 million considered for Q1 2016 deals
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