In the Year of Aluminum, Don’t Forget About Copper

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Aluminum may have been the best-performing metal on the LME this year, but copper is making a good showing, too, with the price hitting a 4 1/2 month peak last Friday.

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Supporting the price earlier this year was a long strike at Chile’s Escondida, the world’s largest copper mine. However, as that dispute was settled workers contracts have come up for renewal at other mines in Chile and Peru, causing if not out-right strikes then the fear of supply disruption.

Workers at Chile’s Zaldivar mine came out on strike after talks failed while nearby Centinelais is also in negotiations with the threat of strike action.

According to Reuters together the two mines produced 340,000 tons of copper in 2016. Unionized workers in Peru, the world’s second-biggest copper producer, began a nationwide strike on Wednesday protesting against labor reforms, Reuters reported.

Meanwhile, recent data from China show the economy picked up in the second quarter and the expectation that the world’s largest copper consumer is likely to hit growth targets for 2017 set earlier this year have only added fuel to the fire in supporting prices.

Analysts polled by Reuters more than doubled their estimates of a global copper deficit this year to 44,000 tons. Underlining how difficult it is to measure so many diverse data points and arrive at accurate numbers, however, the most recent report from the World Bureau of Metal Statistics estimates the copper market has already reached a deficit of 65,000 tons in the January to May period — almost as large a deficit as for the whole of 2016.

Against such a backdrop, it seems counterintuitive that LME-registered warehouse stocks have risen by a third since late June, while at the same time the cash to 3 months spread has increased to near multi-year highs, signaling ample nearby supply.

The conflicting data points of rising prices, estimates of the market deficit, supply disruption, robust consumption and sufficient physical supply to allow an increase in forward spreads can maybe only be explained in terms of timing.

Supply disruption this year had already been factored into prices, but stronger than expected consumption data out of China has lifted prices more recently. Analysts polled by Reuters are not expecting significant ongoing further supply disruption from wage negotiations in South America and the Indonesian government has called in the head of Freeport McMoRan to try to settle a long-running dispute over the world’s second-largest copper mine at Grasberg.

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On balance, most analysts do not seem to expect the market will continue in deficit next year and indeed are predicting for it to return to a surplus of some 74,000 tons. Copper’s performance this year may have had its day, with an anticipated push about $6,000 dollars per ton proving unsustainable in the medium term.

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