Copper outlook dim as macroeconomic challenge looms

The copper price is set to dip during the second half of the year, as poor producer discipline, higher output and lower Chinese demand growth combine for a fifth consecutive year of price decline in 2016, according to a new report by market analysts at Thomson Reuters GFMS.
Analysts expected copper to retreat in 2016 to an average price of $4 850/t in nominal terms, the company said Wednesday.
However, the dark cloud circling the red metal had a silver lining as prices were expected to improve from 2017 onwards, on the back of the global economy picking up some momentum, to gain by 5% year-on-year to $5 100/t. Coupled with shrinking surpluses, GFMS expected prices to see a much stronger upswing of 12.5% in 2018, to reach $5 738/t.
In real terms (2015 prices), however, the price would remain below $5 000/t in 2016, and would only see a positive turn by 2018, analysts advised.
According to GFMS, 2016 was expected to be the bottom of the copper price cycle, despite a surplus of 150 000 t. A surplus of a similar magnitude was forecast for 2017, with improving demand growth countered by a pick-up in mine and refined production. The copper market was expected to remain in surplus to 2018.
“The reaction by the industry at the top end of the cost curve in our mine economics coverage has been limited, with annualised cutbacks of around 200 000 tonnes, and the bulk of that from the temporary suspension of Katanga, in the Democratic Republic of Congo, and Mopani, in Zambia,” analysts stated.
Prices had recovered from the near seven-year low of $4 318/t recorded in mid-January, but there was a lack of conviction that a significant move higher was justified. According to GFMS’s global chief technical analyst, copper had been forming an inverted head-and-shoulders pattern. “This medium-term bullish move would only be jeopardised, basis Comex, by closes below the exponential 21-day moving average and the nearby 23.6% Fibonacci retracement at 2.1782 ($4 802/t),” GFMS stated.
Ironically, from a fundamental perspective, the present lull above the earlier lows might ultimately help to set copper prices on their next leg down, as producers feel less need to act, the report advised.

The report’s base case scenario forecast moderate global gross domestic product growth of 2.7% on average in the next three years. Consumption would continue to be heavily reliant on China, with a forecast global share of 46% in 2018, just higher than 45.5% in 2015.
GFMS reported that global copper consumption growth shrank to 1.9% last year, with another year of sluggish growth seen in 2016. Chinese copper consumption held up better than expected last year, but was nevertheless still slowing. This year it was forecast to grow at around half the rate in 2014, and to moderate further to around 3% over the medium term.
Demand in the EU-28 improved by 2.4%, reflecting a mixed picture across Europe. Germany remained the region’s economic powerhouse, while demand improved in more peripheral economies such as Italy and Spain. In the US, copper demand increased somewhat by 1.1%, owing to falling demand in some end-use markets, such as the oil and mining sectors.
In Japan, Brazil and Russia, copper consumption fell significantly, while in India a 5% rise fell short of expectations. Over the longer term, the Indian government’s announcement of many infrastructure projects held positive news for the copper price.
GFMS said that the outlook for copper was not particularly inspiring over the medium term. “We believe that the worst of the downturn will be behind us by late 2016. However, bearing in mind demand growth consistently below 3% compared with circa 4% as recently as 2014, the transition to a sustained deficit market will now extend beyond our three-year forecast horizon to around the turn of the decade. Even so, there is no doubting that the current low-price environment is sowing the seeds for the next boom as projects are shelved, delayed, sold or abandoned completely,” analysts said.
In the base case scenario, mine production would grow over the next three years, albeit at a slower pace than in the recent past, as miners continued to deliver on investments made during the boom years. This would filter through to higher refined output, which GFMS estimated would grow by an average of 2.1% in the next three years.
With about 400 000 t/y of smelting capacity ramped up towards the end of last year, analysts expected a further addition of smelting capacity to enter the markets this year.
With production exceeding consumption throughout the forecast horizon, the copper market was expected to remain in a surplus, albeit at a declining rate, with less than 60 000 t by 2018. Total stocks, measured in terms of weeks’ consumption, were estimated to reach 6.6 weeks by the end of the three-year forecast horizon.


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