copper price

The showdown between global copper miner Freeport-McMoran, Inc. and the Indonesian government got a little hotter this week.

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Arizona-based Freeport majority-owns the world’s second-largest copper mine, Grasberg in Indonesia. The company has been trying to get a new permit from the Indonesian government to continue exporting copper concentrates for the last six months. On Monday Freeport said it would not accept terms of a deal the government offered that would allow it to resume shipments of copper concentrate that have been idled since January 12.

One More Year… Then Give Up Your Mine

Friday the Indonesian government offered Freeport a new, one-year deal that would allow the company to continue exports but only if it agrees to new rules requiring it to build a new copper smelter in Indonesia within the next five years and also agree to switch to an operating license, the terms of which would require Freeport to, eventually, give up control of Grasberg.

Kennecott Copper Mine

Open pit copper mines such as Rio Tinto’s Kennecott in Utah could increase production and increase sales if Grasberg stays closed. Source: Adobe Stock/Photofly.

Freeport CEO Richard Adkerson, naturally, turned down that offer and said the company is unwilling to revisit the terms of its 30-year contract to mine at Grasberg, which accounts for about a third of Freeport’s annual copper production and 40 to 50% of its worldwide assets. He also said Freeport would consider going to arbitration if it can’t settle this dispute within 120 days. Read more

All work has stopped at Freeport-McMoran‘s giant Grasberg copper mine in Indonesia, just over a month after the country halted exports of copper concentrate to boost domestic industries.

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Freeport had said the suspension would require the mine to slash output by 60% to approximately 70 million pounds of metal per month if it did not get an export permit by mid-February, due to limited storage. A strike at Freeport’s sole domestic taker of copper concentrate, PT Smelting is expected to last at least until March and has limited Freeport’s output options as Grasberg’s storage sites are now full.

Nippon Exec: Chinese Steel Prices Will Hold Firm

Nippon Steel & Sumitomo Metal Corp., Japan’s biggest steelmaker, expects steel prices in top consumer China to hold firm at least until its Communist Party congress late this year, amid solid demand that is underpinning coking coal and iron ore markets.

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Chinese futures contracts for steel rebar used in construction have already risen 17% in 2017, on top of a gain of more than 60% last year

We warned last month that the mostly small losses the prices our MetalMiner IndX experienced were caused by investors taking profits.

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Our suspicions were confirmed when almost all of our sub-indexes had big price rebounds this month. The Automotive MMI jumped 12.2% Raw Steels 8% and Aluminum 6%. Even our Stainless Steel MMI only dropped 1.7% and has taken off since February 1 as nickel supply is even more in question now with both the Philippines and Indonesia’s raw ore exports in question.

The bull market is on for the entire industrial metals complex. Last month’s pause was necessary for markets to digest gains but the strong positive sentiment for both manufacturing and construction shows no signs of ebbing in the U.S. and Chinese markets.

Last year, investors were wondering whether copper was worth more than $6,000 per metric ton or not.

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Late in 2016, prices were struggling to overcome this psychological level, but things are shaping up for 2017 to be a hot year for copper production, which could translate into a hot year for the copper price.

Upside momentum for copper prices picked up on supply disruptions. Copper rises above $6,000 per metric ton. Source: MetalMiner analysis of FastMarkets.com data.

Escondida Stops Production

Chile’s massive Escondida mine’s processing plants completely stopped supplying refined copper to markets on Thursday as no miners arrived for morning work. The mine produced around 1 million mt of copper last year, or 5% of global production.

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Copper prices have been on the rise and could continue their ascent if the world’s two biggest copper mines continue their strike.

According to a recent report from CNBC, copper futures contracts for March delivery grew by more than 1.5% this week following information that BHP Billiton is halting production at the world’s largest copper mine, Escondida, located in Chile.

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“It’s presenting the market with a bullish case for a little upside, Vivienne Lloyd, base metals analyst for Macquarie in London, told the news source.

Copper prices were already on the ascent, growing more than 30% last fall with the U.S. dollar weakening close to the election, combined with traders’ more optimistic views on China.

“Traders were already bullish into the strike, Dane Davis, commodities research analyst at Barclays, said. “People have watched the negotiations deteriorate.”

Copper Disruptions Bring Upside Potential

Our own Raul de Frutos wrote just this week on the factor the copper mine strikes will play in the metal’s recent bull run. He added:

“Base metals looked more bullish in January and strong Chinese data is no doubt driving that. China’s PMI was in growth territory for the seventh consecutive month.”

Raul concluded: “Copper prices might look expensive compared to what they were just three months ago. However, that rally might just be the beginning of a bigger move. Sentiment in the industrial metal complex remains quite bullish and there are factors currently playing out that could build the case for another rally in copper prices. Copper buyers should minimize their commodity price risk exposure accordingly.”

How will copper and base metals fare in 2017? You can find a more in-depth copper price forecast and outlook in our brand new Monthly Metal Buying Outlook report. For a short- and long-term buying strategy with specific price thresholds:

Copper prices rebounded to a 6% increase in January. The combination of a falling dollar and a potential work stoppage at the world’s largest copper mine lifted prices to test the psychological level of $6,000 per metric ton.

Base metals looked more bullish in January and strong Chinese data is no doubt driving that. China’s PMI was in growth territory for the seventh consecutive month. Here in the U.S., President Donald Trump signed executive orders to continue progress on two key energy pipelines, making good on his campaign pledge to rebuild the nation’s infrastructure.The new president also broke with protocol and expressed a desire for a weaker dollar.

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Trump’s words helped drive the value of the dollar down in January. This gave a boost to industrial metal prices and dollar-denominated commodities such as crude oil, which continues to remain supported above $50 per barrel.

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We posted a review of the copper market last week. It called out alternative views on the balance of supply and demand and the resulting direction for prices this year.

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One of the caveats in the post was the possibility of supply disruption in 2017 returning to the more historical norm of 5% of supply from last year’s unusually stable 3.5%. No sooner was our review posted, then reports came out that wage negotiations at the Escondida mine in northern Chile appear to be taking a turn for the worse.

What’s Happening at Escondida?

Escondida is 57% owned and operated by Anglo Australian giant BHP Billiton, with Rio Tinto Group holding a 30% stake. It was thought at current prices BHP was making enough to agree an early settlement, but a report in the Telegraph newspaper suggests that negotiations are breaking down as both parties’ positions polarize. Miners are rejecting BHP’s current offer and the negotiations look likely to go to government arbitration before a strike can be called.

In their defense, BHP say copper prices are still lower than they were at the time the current deal was struck with unions and sources close to the company point out that Escondida workers are still paid well above the national average, but that is unlikely to have much impact on the miners union’s demands.

What’s This Mean for Copper Prices?

Neighboring miner Antofagasta, which has operations not far from Escondida, reported a strong finish to the year, with 2016 production up 12.5% over 2015. Copper production surged 13.8% in the fourth quarter versus the previous three months, while costs fell, rather undermining Escondida’s argument that it can’t afford to pay any more.

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With wage negotiations looming at Canadian operations in coming months the fear is Escondida could spark off a wave of strikes and supply disruptions. Although opinions vary, many estimate the copper market is close to supply-demand balance, so supply threats are having a disproportionate impact on all prices and creating considerable volatility. Escondida may be the first of this year’s wage negotiations, but it won’t be the last making price prediction particularly difficult in the months ahead.

Copper prices had a spectacular run back in November. So spectacular than no one expected it but us. Ever since, most analysts have questioned the sustainability of this copper rally. Their argument: prices have run ahead of fundamentals.

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I have a different opinion on this. The fact that copper prices have held well after such a run is a sign of strength. It suggests that investors are holding onto copper despite the gains. The profit-taking over the past two months was very constructive and now that prices have rested, it seems like investors are just waiting for some new information before sending prices to the roof again.

3-Month LME copper price. Source: MetalMiner analysis of Fastmarkets.com data.

Other than copper’s price action, there are many reasons to believe another price rally might be around the corner.

The base metals are looking more bullish as we move into February and strong Chinese data is no doubt driving that. President Donald Trump recently signed executive orders to continue progress on two key energy pipelines, making good on his campaign pledge to rebuild the nation’s infrastructure. In addition, energy prices continue to remain supported with crude oil persistently trading above $50 per barrel.

Escondida Strike: New Catalysis?

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 incentivize new developments, it will take a long time for that new supply to hit the market. The International Copper Study Group (ICSG) is forecasting zero growth in mine supply this year.

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Supply concerns have recently risen due to a potential strike in the giant Escondida copper mine in Chile. This is the world’s largest copper mine, supplying 5% of the world’s copper production. According to a Telegraph article, disruptions of this size and scale can affect copper prices. Moreover, it may set the stage “for wage negotiations across the industry that could lift costs for copper miners,” according to the paper.

What This Means For Metal Buyers

Copper prices might look expensive compared to what they were just three months ago. However, that rally might just be the beginning of a bigger move. Sentiment in the industrial metal complex remains quite bullish and there are factors currently playing out that could build the case for another rally in copper prices. Copper buyers should minimize their commodity price risk exposure accordingly.

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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.

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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. Read more

Our January MMI report saw almost universal price pull backs in December, but that’s to be expected in a bull market with active investors.

The monthly MetalMiner IndX showed only moderate (less than 4%) price falls, even though they were visible across almost all the sub-indexes.

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The price prospects for most of the metals we track remain strong and we have already seen some renewed price increases since we initially published our sub-index reports starting on the first of the year.

The Chinese economy and the strong dollar continue to power the metals bull market… at least for now. Happy new metals year!