Copper market outlook - Upside momentum strikes out

This article is an extract of the monthly Commodity Briefing Service for Copper which examines copper market trends over the past month.

Julia Tilley | 14 April 2017

LME cash copper prices averaged US$5,838/tonne over the first quarter of 2017, just 1.5% above our forecast of US$5,752/tonne. We believe that investor sentiment was one of the main supportive factors. CFTC net longs were relatively high for much of the quarter, as were LME commitments of traders reports. The high level at which exchange stocks ended the quarter, however, suggests some fundamental weakness, and the recent decline in net longs could indicate this is feeding through to the investment community.

Furthermore, several supply shocks have supported prices. One of the most obvious sentiment boosts was the 43-day Escondida strike (we had initially anticipated it would be closer to 25 days) resulting in an estimated 220,000 tonnes lost production, although this could turn out to be higher. Cessation of production at Grasberg, and a 50% reduction in production at Cerro Verde during an 18-day strike added to this. However, the strikes haven't yet fed through to the refined market, where supply has been boosted by an influx of scrap, reflected in widening discounts.

President Donald Trump's posited infrastructure spend in the U.S. has also supported sentiment to a degree, but we are unclear how it might affect demand until further details are provided. Chinese credit restraints may also have dampened infrastructure activity over the past few weeks.

We expect that in the second quarter of the year, several of these sentiment boosters will be removed (Escondida resumes full production along with Cerro Verde and Grasberg recommences exports). This could add downward price pressure, especially once all fears of a supply shortage are assuaged, which we believe stronger scrap supply will support. As a result, we forecast a 1.5% quarter-over-quarter decline in cash prices to US$5,750/tonne in the second quarter. We have raised our second-quarter forecast from US$5,442/tonne, partly due to mark to market and partly to a more positive outlook for the resumption of construction and manufacturing activity, some of which we believe may have been delayed from the first quarter into the second.


Our full-year 2017 price forecast has also been raised to US$5,628/tonne on a cash basis, from US$5,350/tonne. This primarily reflects a slightly stronger fundamental picture, as we have incorporated some final 2016 figures into our supply and demand model, and adjusted stock levels throughout the supply chain. Our main adjustment has been to lower 2017 mine production growth to 1.8% year over year, down from 2.2% year over year to 20.3 megatonnes. This is largely due to a moderating of expectations for Russian and Australian production after reducing 2016 output, based on full year data. We have also made adjustments to both Chinese refined consumption and production.




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