The copper market has been sending mixed messages for the last year and the start of 2017 is no different. Consumers had gotten used to lower prices and the narrative of new mine investment swamping lackluster demand growth, only to be surprised on the upside last year by strong demand – both physical and speculative – out of China.
As Andy Home of Reuters commented this week, maybe more surprising was the lack of supply disruption. Usually the copper market can expect something like 5% of annual production to be disrupted by labor disputes, bad weather, government interference, power outages or simply falling ore grades impacting production, but 2017 saw a low level of unscheduled production losses, in the region of 3.5%, and yet copper prices continued to rise.
Where is Demand Really at?
Demand on the other hand has also surprised on the upside, according to HSBC demand in top consumer China last year was stronger than anticipated due to a greater government stimulus impact on the power grid investments and higher end use demand, particularly for appliances and consumer goods. A tax incentive on small cars boosted Chinese auto sales in 2016 and since the government extended the initiative to 2017 at slightly higher tax rate (7.5% vs 5% in 2016) this stimulus is thought likely to continue.
HSBC notes that the likely cool-down in the housing sector should temper construction demand, but also counters that by writing that it expects higher demand from the industrial segment, electrical grid investments and consumer and transportation sectors to more than offset this negative impact.
In summary, HSBC expects a better outlook for Chinese consumption in 2017 prompting the bank to upgrade their estimate for Chinese demand growth estimate to 2.7% from 1.7% previously. Meanwhile higher-than-expected government spending and lower taxes in the U.S. and a better performing Eurozone economy should help sustain copper demand growth in the developed world the bank says in its latest Quarterly Review.
Rather than a wall of new supply meeting subdued demand, what we have actually seen is reliable supply meeting solid demand growth and, setting aside the impact of strong investor sentiment lifting prices, the result has been rising prices on the basis of a relatively balanced market. HSBC goes on to say supply growth will continue, albeit at a modest pace and as a result further price rises from here will be mitigated by increased supply.
Can Labor Peace be Maintained, Production Problems Stay Minimized?
Specifically, the bank calls out new mine supply still to come on stream; from Las Bambas in the region of about 120,000 metric tons in 2017, from Sentinel of about 95,000 mt, Bozshkol about 70,000 mt, Aktogay about 60,000 mt, and Cerro Verde about 70,000 mt, although slower ramp up at other projects will reduce the impact.
But Reuters calls into doubt the benefits of supply side increases and suggests looming wage negotiations at Escondida in Chile, then Sudbury and Highland Valley in Canada accompanied by uncertainty at Grasberg due to a change in government mining policy could mean a return to 5+% supply disruption in 2017 with the potential for considerable price support if not even greater volatility.
The International Copper Study Group, meanwhile, is forecasting mine supply growth to drop from 4% last year to zero this year. HSBC is not predicting the market will be in balance before the end of the decade but the group is, broadly speaking, an outlier on this.
What This Means for Copper Buyers
Many feel the market has the potential be driven higher this year and next, if not by outright supply tightness then by the perception the market is moving in that direction. What to say, then, of Reuters and the advice that the raw materials part of the copper supply chain is starting to tighten again, evidenced by the drop in smelter treatment and refining charges on 2017 supply contracts? Guesswork aside, this is still the best indicator as to what is happening in the copper concentrates market.