Copper

After rising strongly for the last month or more, copper prices now appear to be buffeted by every scrap of news that comes out.

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“Copper prices fell this week as investors cashed in gains after the previous session’s rally,” news.com in Australia reported yesterday. The gist of the argument seems to be the 23% rise in the copper price last month was a step too far. The site quoted Caroline Bain of Capital Economics saying “You only have to look at the levels of investor buying to see that quite a lot of these rallies have been based on euphoria rather than grounded in fundamentals. We think we will see some profit-taking inevitably as we end the year”

Reuters, on the other hand, took a somewhat contrary view, reporting copper prices climbing mid-week, buoyed by a pickup in U.S. manufacturing. The newspaper reported new orders for U.S. factory goods recorded their biggest increase in nearly 1-and-a-half years in October, evidence that the manufacturing sector is gradually recovering after a prolonged downturn and as demand signals from China also improve. Read more

The copper market will go into deficit by 2020, just when Rio Tinto‘s, extension to the Oyu Tolgoi mine in Mongolia comes online, the company said on Tuesday.

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The Anglo-Australian mining major gave approval in June for a $5.3 billion expansion of Oyu Tolgoi, one of the world’s largest copper mines and a project central to the major’s efforts to become less dependent on iron ore.

Traders Still Skeptical of OPEC Output Cut

The Organization of Petroleum Exporting Countries‘ output set another record high in November, rising to 34.19 million barrels per day from 33.82 million bpd in October, according to a Reuters survey.

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Oil prices pared losses slightly after inventory data released late Tuesday from the American Petroleum Institute showed U.S. crude stocks dropped more than expected last week despite a hefty build of 4 million barrels in Cushing, Oklahoma.

The Census Bureau reported late last week that U.S. construction spending was up during October by 0.5% compared with the September total. Year-over-year, construction spending in October was up by 3.45. During the first 10 months of the year, construction spending amounted to $972.2 billion, 4.5% above the same period in 2015.

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Our Construction MMI was up 8.7% as domestic demand for construction metals shot up just as prices increased nearly across the board for the entire industrial metals complex.

Construction_Chart_December_2016_FNL

Construction demand in the world’s largest metals consumer, China, continues to grow even as the central government there tries to restrict home buying, the engine for that demand.

“It’s likely that the government will expand infrastructure investment to make up for the gap left by property-related investment falling,” Julia Wang, China economist at HSBC told the Financial Times.

What is buoying construction the most is an investor class now excited about all industrial and construction metals. The election of President-elect Donald Trump promises $1 trillion in U.S. infrastructure investment and stronger protections against dumping of foreign imports.

Trump’s policies, while still in their formative stages, are seen as bullish for public construction, particularly infrastructure such as roads, bridges and airports. Stocks of construction companies and materials providers also jumped after Trump’s election.

Public construction spending actually accounted for most of the increase in U.S. construction spending in October — unusually, since that sector has been contracting in recent years — gaining 2.8% compared to September. Spending on educational facilities was especially brisk, up 4.1% for the month, while highway construction gained 1.9%. Compared with last year, however, public construction spending as a whole was off 0.6%.

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While Chinese demand remains a concern, it’s a very good time to be a construction metals investor with positive sentiment nearly across the board when it comes to both construction and metals.

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Renewed economic confidence followed the election of republican nominee Donald Trump and Americans snapped up new vehicles at a rapid pace in November, giving the U.S. auto industry a chance of breaking its all-time record for full-year sales.

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The Automotive MMI was up, too, jumping 8%.

In November, U.S. auto sales rose 3.7% compared with a year ago, according to Autodata Corp. On an annualized basis, that equaled a rate of 17.87 million units. November sales growth projections had ranged from 2.7% at Edmunds.com to 4.2% at Kelley Blue Book. Total sales for November were 1.38 million, that shattered a record for the month that was set in November 2001.

Automotive_Chart_December-2016_FNL

The month’s annual sales rate, adjusted for two extra selling days this November, was 17.9 million vehicles, more than the 17.7 million average estimate.

A contributing factor to the solid month was the Thanksgiving weekend and Black Friday sales, which are having an increasing effect on the month’s output. With one month to go, the auto industry has a decent chance to match or exceed its 2015 full-year record of 17.47 million vehicles sold.

Automotive sales and metals prices are both benefiting from bullish sentiment among buyers and investors. Steel companies stock prices have increased after Trump’s election just as aluminum and copper prices in the bullish metals markets.

Another factor in new car sales is the enduring low prices for both oil and gasoline, which might change soon now that the Organization of Petroleum Exporting Countries and other producers such as Russia have finally agreed to a production freeze.

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Rising oil prices, however, might not be the detriment to auto sales that they have in the past. Hybrid vehicles and simply more efficient fuel consumption have blunted the impact of gasoline prices on new car sales. One of the reasons that the gas tax has become such a poor funding mechanism for the federal Highway Trust Fund is that motorists simply have to buy less gas for today’s efficient, newer vehicles.

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Global automotive giant Volvo is currently taking part in a European Union research project which involves replacing the various cables in trucks with wireless sensors.

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The result is expected to be a dramatic reduction in the amount of copper and plastic used. Every year the Volvo Group should be able to dispense with around 3,000 miles (5,000 kilometers) of cabling, which is the equivalent of 18 metric tons of copper and 33 metric tons of plastic.

Volvo is saying goodbye to miles of cabling in its truck division. Can IoT sensors replace all that expensive copper and plastic? Source: Volvo.

Volvo is saying goodbye to miles of cabling in its truck division. Can IoT sensors replace all that expensive copper and plastic? Source: Volvo.

“The savings could amount to a large number of hours, sometimes even days. In the factory, the cables are awkward to handle and time-consuming to fit in the right place,” said Jonas Hagerskans, a development engineer at the Volvo Group. “The wireless sensors are much simpler to install. The cables are also sensitive to dirt and rust and prone to faults. By replacing the cables with wireless sensors, it is possible to prevent all the potential cabling faults. When trucks come into the workshop for repairs, identifying faults in long cables that are difficult to access is very time-consuming. In the future, our customers could get their trucks back from the workshop more quickly.” Read more

This abridged, holiday week saw both the U.S. dollar, which recently hit a one-year high, and metals prices surge, abandoning their usual behavior, as investors grew excited about the prospects for both infrastructure spending and a stronger U.S. currency.

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How strong is the dollar? The predictions of a December Federal Reserve interest rate increase are above 90% and the euro is headed in the opposite direction as the currencies are already nearing parity.

The recent rise in metals prices has had some strange market effects. The supposedly more reliable “upstream business,” that Alcoa, Inc. recently separated its aerospace and automotive products into, Arconic, was expected to have a higher stock price and better prospects than the commodity aluminum business that retained the Alcoa name. So much so that CEO Klaus Kleinfeld left with Arconic. Well, Alcoa’s stock has soared since the October split became official. Arconic’s hasn’t.

Now might be the time to buy aluminum forward. We’re not so sure about the long-term prospects for copper, but it’s rise in the last two weeks has been meteoric, nonetheless.

Here in the U.S., we celebrated the Thanksgiving holiday and the traditional beginning of the Christmas shopping season. Retailers are offering big discounts as they hope that consumers, weary of the election that finally came early this month, are ready to spend, particularly on rare-earth-using electronics.

Online shopping was on pace to reach $2 billion on Thanksgiving Day, up 16% from a year ago, according to Adobe Systems Inc., which tracked visits to e-commerce sites. Even our friends in the U.K. are chasing the online deals.

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If consumer spending increases this season it will be another sign that the U.S. economy is ready to turn a page and maybe, just maybe, return to strong growth. We may have a lot to be thankful for this holiday season.

Copper has had a phenomenal run the last few weeks.

After being range-bound in the mid $4,000’s per metric ton for much of the summer, the runaway price caught many by surprise at the turn of the month, rising dramatically to peak at over $5,500/mt on the London Metal Exchange before easing back this week.

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Many have put the surprise win of President-elect Donald Trump as the cause of Copper’s strength, but in reality the rise started before the date of the presidential election. Read more

Iraq would have to compensate international oil companies for limits placed on their production, according to industry sources and documents seen by Reuters, further reducing the prospect it will join any OPEC deal to curb the group’s output.

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The compensation — stipulated in contracts — would compound the financial hit of losing much-needed revenue from crude sales, if the cash-strapped country were to yield to OPEC entreaties to curtail national production.

Why Are Chinese Investors Flocking to Copper?

Chinese investors, whose rush into copper hauled it to 16-month highs recently, say infrastructure spending and government reforms will keep the metal well supported this year and into 2017.

When commodity producers talk down the market you know prospects really aren’t very good for a price rise.

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Iván Arriagada, chief executive at Antofagasta was interviewed by the Financial Times while at the recent LME week and is quoted as saying Copper will continue to lag behind as other commodity prices rebound, adding the market is likely to remain oversupplied for at least the next three years. While demand for copper in China will grow at around 3% next year, that growth will be outweighed by oversupply.

Chinese demand this year has been bolstered by a surprise stimulus boost early this year but many are expecting that to fade by Q2 next year resulting in a surplus of 192,000 metric tons in 2017, up from 185,000 mt this year, according to Reuters.

“We continue to forecast a surplus market for both 2016 and 2017,” said Grant Sporre of Deutsche Bank, “This is sufficient to … continue to weigh on prices.”

A prediction Arriagrada would appear to support when he said “we may see events where the price drops further.”

Although prices are near year-highs, at least since March, imports of copper by China fell this month to their lowest since February of last year and the domestic market remains at a discount to the international market.

The Moderate Medium Term

The current increase in prices has caught the market by surprise (but not us). Copper hit a 15-month high last week after powering to $5,443 per mt, not on some sudden strong fundamentals, but on speculator buying. What’s driving the current surge in prices appears to be a disconnect in the copper market.

‘Refined copper is said to be broadly in balance, the International Copper Study Group and the International Wrought Copper Council both estimate that the refined market is in balance, a position ironically supported by the London Metal Exchange and Shanghai Futures Exchange which has seen almost unprecedented rises and falls in inventory this year.

Yet, at the end of October, the net year to date movement in all global exchange copper stocks (across the LME, SHFE and Chicago Mercantile Exchange Group warehouse systems) has been a rise of just 22,500 mt, in a global copper market of 23 million mt. Even so, current speculator enthusiasm aside, in a poll of analysts at LME week, Reuters found it hard to find anyone who was bullish about copper in the medium term or about the pace of infrastructure investment in China next year.

Nearly everyone is quoted as saying they expect both demand, and hence prices ,to ease from about Q2 2017 onward. The expectation seems to be that surplus concentrate will make its way through to the refined market next year and that the two cannot exist as parallel universes indefinitely.

Copper’s Long-Term Future

Further out there are better prospects for copper. Capital expenditures have been slashed and for firms like Antofagasta and mining is all about cost containment at the moment. The firm has two projects involving expansion at its operations at Pelambres and Centinela, which could add 200,000 mt per year but the firm is on no hurry and has given a deadline of the end of next year to announce if it plans to proceed or not.

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Long-term grades are falling and potentially developments like electric cars are cited by producers as cause for rising demand but that is still some way down the line. As the FT points out, state-owned producer Codelco needs to spend $17 billion over the next four years just to maintain its copper output due to declines in the grade of copper extracted from its current mines. If those funds are not spent, the supply surplus will dwindle but for now it remains and so, too, will prices around current levels, if not lower in 2017.

Copper prices jumped 14% in just three days this week.

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Such a price surge is something that no one can predict. Fortunately, this doesn’t mean that the move catches you by surprise. Indeed, we recommended to our subscribers that they be ready to buy forward when prices breached $5,050/mt.

We had witnessed enough bullish signals across the metal complex to be prepared for a copper rally. Just days before the price surge, we pointed out that the technical picture for copper had already started to improve, signaling a switch toward a bull market.

3M LME copper skyrockets. Source: MetalMiner analysis of fastmarkets.com data

Three-month London Metal Exchange copper skyrockets. Source: MetalMiner analysis of Fastmarkets.com data.

In his victory speech, Donald Trump said he would rebuild American infrastructure and double U.S. economic growth. Some might be tempted to think that Trump’s victory propelled copper’s bull run, but the red metal began breaking upwards when markets were still pricing in a Hillary Clinton victory.

To us, what explains copper’s bull market is the increasing investors’ appetite for base metals. Even though copper’s fundamentals have little bullish sentiment, the metal is enjoying a tailwind. It’s like when the internet boom was on, shares of even those internet companies making no profits would rise.

Most likely, investors’ are pouring money into base metals due to strong Chinese demand. Chinese demand from infrastructure and construction has been robust this year and the release of new manufacturing PMI data confirmed strong demand. The Caixin manufacturing PMI for October rose to 51.2, the highest reading since July 2014. That handily beat market expectations.

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Also, even though copper markets are still in surplus, investors know that copper is a very slow business in terms of new project development. Consequently, even if prices continue to rise enough to incentive new developments, it will take a long time for that new supply to hit the market.

Bottom line, industrial metals bottomed earlier this year and now every single base metal including copper has entered bull territory. For 2017, expect higher metal prices with small setbacks along the way.