Copper prices have been quite volatile over the last 6 months.
Initially the volatility was driven by speculation rather than fundamentals. Prices were buoyed after the US election on expectation that it could result in significant US infrastructure spending. Whilst in early 2017, disruptions at the world´s three largest Copper mines pushed the red metal to 20 month highs. As the respective disputes were resolved and uncertainty set in over the US governments’ ability to deliver on the extent of infrastructure spending promised, prices once again dipped, eroding most of the gains achieved during 2017.
However, the market should swing into a deficit (undersupply) position sooner than originally anticipated, meaning that copper prices are likely to have reached their floor. Consensus is that this will happen in the second half of the year. There is also potential for further upside in the near term. Supply disruptions could continue in the second half of 2017, as a number of other mines in Chile have worker contracts up for renewal.
From a demand perspective, China has re-confirmed that it expects to achieve growth of 6.5% in 2017 and 6.3% in 2018 and 2019. Whilst an uncertain political, policy and trade environment has created additional uncertainty over global growth, demand from China and emerging markets should support higher copper prices.1 Thus gradual price increases should start to be more pronounced from Q4 2017 onwards and this time the higher prices will be here to stay.
The long-term downward trend of copper prices on the London Metal Exchange (LME) bottomed-out during 2016. Copper prices realized an upside breakout in Q1 2017 after averaging at US$2.2/lb between Q2 2016 and Q4 2016. In Q4 2016, the LME copper prices averaged US$2.4/lb, reflecting a 10.5 percent increase from the previous quarter (Q3 2016); however, prices averaged US$2.6/lb in Q1 2017 — a 10.6 percent increase from Q4 2016. The y-o-y prices increased by 8.1 percent in Q4 2016 and about 24.9 percent in Q1 2017.
Copper prices rose to a 20-month high in February 2017 at US$2.7/lb, before falling back to US$2.6/lb in March 2017. This increase was a result of supply disruptions at three of the world’s largest mines — Escondida in Chile, Grasberg in Indonesia and Cerro Verde in Peru. Production was negatively impacted by labor strikes at the Chile and Peru mines and copper export restrictions in Indonesia.
During 2016–21, prices are expected to increase at a Compound Annual Growth Rate (CAGR) of 7.8 percent, to reach US$3.2/lb by 2021, from an average price of US$2.2/lb in 2016, driven by strong growth in consumption in China, Europe and the US. In March 2017, China’s Purchase Manufactures Index2 (PMI) indicated an expansionary economic environment for eight consecutive months. In the same
Source (s): Import & Export commodities by industry, China Custom Statistics, HKTDC Research, accessed April 2017; IMF Primary Commodity Prices, International Monetary Fund, accessed April 2017; China Imports and Exports of Copper and Aluminum in February 2017, Shanghai Metals Market; accessed April 2017; Metals-London copper hits highest in more than a week, demand hopes underpin, 29 March 2017, CNBC website, as accessed on 11 April 2017; KPMG Analysis
China's Q4 2016 copper imports rose to 1,160 thousand tons (Kt), reflecting a 10.5 percent q-o-q increase from 1,050Kt in Q3 2016. This was due to expansions in the manufacturing sector and an unexpected rebound in the property market from a construction boom, which in turn led to increase in Q1 2017 copper demand in China.
Source: Aust Gold and Copper: Reporting season wrap — Gold and Copper, Credit Suisse, 1 March 2017; via Thomson Research/ Investext, accessed April 2017; F stands for forecast data; DRC stands for Democratic Republic of Congo; RoW stands for Rest of the World
Source: Aust Gold and Copper: Reporting season wrap — Gold and Copper, Credit Suisse, 1 March 2017; via Thomson Research/ Investext, accessed April 2017; F stands for forecast data
Source(s): Aust Gold and Copper: Reporting season wrap — Gold and Copper, Credit Suisse, 1 March 2017; via Thomson Research/ Investext, accessed April 2017; F stands for forecast data
Source: Capital IQ, consensus prices, accessed April 2017; Aust Gold and Copper: Reporting season wrap — Gold and Copper, Credit Suisse, 1 March 2017; Resources and Energy Quarterly, Bureau of Resources & Energy Economics (BREE), Australian Government, March quarter 2017, accessed April 2017; 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
The total value of 10 major deals5 announced in Q4 2016 was US$0.1 billion, compared with 12 deals in Q1 2017 valued at US$1.3 billion.
The increase in deal activity in Q1 2017, as compared with Q4 2016, was due to the high-value deal, announced on 5 January 2017 where Glencore Plc agreed to acquire 31 percent of Mutanda Mining SARL’s share capital (a copper and cobalt mining company) for US$0.9 billion.
Source: Mergermarket and Thomson database accessed April 2017
*Only deals with disclosed value for Q4 2016 and Q1 2017 have been considered
1 CBNC, China aims for around 6.5 percent economic growth in 2017 accessed April 2017; The State Council The People's Republic of China, World Bank keeps its forecast of China GDP at 6.5% in 2017 accessed April 2017
2 Resources and Energy Quarterly, Bureau of Resources & Energy Economics (BREE), Australian Government, March quarter 2017, accessed April 2017; ‘The Purchasing Managers' Index (PMI) is an indicator of the economic health of the manufacturing sector. The PMI is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment’; ‘¬¬The ISM Manufacturing Index’ is based on surveys of more than 300 manufacturing firms by the Institute of Supply Management. The ISM Manufacturing Index monitors employment, production, inventories, new orders and supplier deliveries.’ sourced from Investopedia website, as accessed on 11 April 2017.
3 Resources and Energy Quarterly, Bureau of Resources & Energy Economics (BREE), Australian Government, March quarter 2017; Gold and Copper Sector: Commodities and FX quarterly review, Credit Suisse, 1 March 2017, via Thomson One; accessed April 2017; Workers to end strike at Peru's top copper mine Cerro Verde, 30 March 2017, Reuters website, as accessed on 11 April 2017; Freeport awaits permit to end costly Indonesia export ban: executives, 5 April 2017, Reuters website, as accessed on 11 April 2017
4 "Resources and Energy Quarterly", Bureau of Resources & Energy Economics (BREE), Australian Government, March quarter 2016, accessed April 2016
5 Mergermarket and Thomson database, accessed April
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