Copper prices retraced in December. After the huge price run in November we were expecting to see some profit taking as prices need to digest gains.
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So far, the decline has been limited, with prices holding above $5,500/mt. Although copper has lost some of its post-election gains, it still managed to end 2016 with decent yearly gains, suggesting that sellers are not totally in control.
Copper’s Bullish Narrative
One of the key factors supporting copper prices is the earlier-than-expected supply deficit. While most analysts were previously projecting the copper markets to move into deficit by the end of the decade, many of them are now expecting a deficit as early as this year.
Another factor supporting copper prices is higher energy prices. Oil prices, the main benchmark for energy prices, regained the $50/barrel level in December. Saudi Arabia said it could be ready to cut output more than originally agreed upon at the latest Organization of Petroleum Exporting Countries meeting. Non-OPEC countries, including Russia, also agreed to an output cut north of 500,000 barrels a day. Energy is key in the metals industry. For copper, energy can form almost 20% of the production costs.
President-elect Donald Trump’s proposed infrastructure investments are also positive for copper prices. However, in our view, the key demand driver continues to be China, by far the largest consumer of the red metal. China’s Caixin manufacturing purchasing managers’ index rose to 51.9 in December from 50.9 in November and beat market expectations. That figure marked the sixth straight month of growth and the strongest upturn in Chinese manufacturing conditions since January 2013.
What Could Add Pressure to Copper Prices
The better-than-expected demand from China explains the ongoing strength in industrial metal prices. However, there are concerns that the country’s demand growth rates could slow next year. The real estate and automotive sectors are the engine propelling this rapid growth. If the demand growth from these sectors slows, this could have strong repercussions on China’s demand for industrial metals.
Another factor to watch is the ongoing strength of the U.S. dollar. Copper is no different than other commodities that have a negative correlation to the dollar. Further appreciation of the dollar could negatively impact copper prices. Higher interest rates in the U.S. are among the factors contributing to a stronger dollar. In December, The Federal Reserve raised interest rates by a quarter point, as expected, but policymakers signaled a likelihood of three increases in 2017, up from prior expectations of two moves.
What This Means For Metal Buyers
The recent price decline in copper prices wasn’t that dramatic. So far, it seems like the bulls are still in control. A strong dollar and a possible slowdown in Chinese demand are factors that could bring prices down. Up until now, China’s demand looks strong and the dollar hasn’t had a big impact on metal prices. Therefore, we need actual reasons to turn bearish on copper.