While prices have rebounded this quarter, downward pressure remains as speculation of a further deceleration of the Chinese economy continues to negatively impact market sentiment.
And rightly so. China consumes approximately 45 percent of the world’s copper so there is no surprise that the market will react to any positive or negative data impacting Chinese demand.
But perhaps too much focus is being placed on the demand situation and not enough on supply. After all, there have been concerns of excess supply in the past which have not materialized.
The industry is prone to supply disruptions which can change market dynamics quickly. In fact, nearly all of the major miners have already announced production cuts resulting from supply disruptions.
Miners operating in Chile, where a third of the world’s copper is sourced, have cut output forecasts due to both water availability issues from an ongoing drought and severe floods which halted production and in some cases precipitated mine closures.
“Perhaps too much focus is being placed on the demand situation and not enough on supply.”
Labor contract disputes and union negotiations are not uncommon in the industry and can just as easily cause further supply disruptions. As can startup delays on new expansion projects which are expected to drive the global production surge over the medium term.
New stimulus measures in China can also further aid in the recovery of industrial activity. The Chinese government recently announced a reduction to their reserve requirement ratio. This reduced the amount of money banks must set aside as reserves, in a bid to spur more lending. More policy loosening could be forthcoming.
If we combine the possibility of further Chinese stimulus measures with supply disruptions then perhaps the market will recover much sooner than 2017 –when demand is expected to once again outstrip supply.