In January, copper prices hit five-year lows due to a combination of sluggish demand, supply growth and a strong US dollar, and, although prices have since rebounded, analysts are generally remaining bearish about the red metal for the rest of 2015. But with production cuts expected from many of the industry's biggest players, is a supply shortage on the horizon and is the market, which is said to mirror the global economy, set to turn around?
Copper is used in everything from construction to manufacturing, electronic goods, and heating and cooling systems to plumbing, and contributes hugely to a whole host of industries. Price fluctuations, therefore, are often said to be indicative of the health of the global economy, and certainly act as a barometer for the state of the industries in which copper is used.
And, with analysts in the main currently bearish about the red metal, the future fortunes of both copper and the wider global economy - at least in the near-term - are not looking particularly favourable. "Inventory has been rising since December and our market balance calculations still show a mild surplus condition for 2015 and 2016, which would tend to point prices down," says John Mothersole, research director for the IHS Pricing and Purchasing Service. His predictions are generally in line with other analysts' forecasts, albeit at the bearish end of the spectrum.
Combine rising inventory with an anticipation of slowing demand - particularly from China - and a strong US dollar, and it becomes even clearer why many analysts are not predicting a significant pick-up in the copper market in the near future.
Explains Maritza Araneda, partner at KPMG's Chile firm and commodity lead for copper: "China consumes approximately 45% of the world's copper and as such the state of the copper market has been closely aligned with the Chinese economy for the last decade. As the demand outlook from China weakens, whether it be through concerns of deceleration in the economy or weaker consumption data, then uncertainty over the country's level of metal consumption will increase. This will in turn impact copper pricing."
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The state of the US dollar, which, as the US economy has strengthened, has followed suit, will also continue to play into copper prices. "Copper is traded in US dollars so, simply put, when the dollar strengthens, copper becomes more expensive, which in turn impacts demand," Araneda notes. "Copper prices collapsed in January at a time when the dollar was enjoying its highest levels in six months, and although it's hard to say what will happen with the dollar, my expectation is that it will continue to strengthen on the anticipation of increases in interest rates and growth in the economy."
Production cuts support rising prices
Yet, despite these bearish trends, production cuts across the copper industry have led some commentators to go in the opposite direction, predicting instead a sharp rise in prices. For example, Citibank's research department said in February: "The current bearish sentiment toward copper is being driven by concerns about China's economy slowing, with the market ignoring the fact that mine supply is looking increasingly constrained. We expect increasing supply problems to be highly supportive of copper prices in the second half of the year, and continue to target a return to $7,000 per metric ton levels before year-end."
Cuts have indeed been announced all over; BHP, for example, has said that production at its Olympic Dam mine in South Australia will be reduced by between 60,000-70,000 metric tons in 2015, while Chile's Codelco stated in January that it would aim to cut costs by around $1bn to protect its profits from the sharp fall in copper prices. A drought in Chile, the world's largest copper producer, is also hampering production.
"Nearly all the major miners have announced production cuts, which has in turn eased surplus concerns," Araneda confirms.
Some analysts remain unconvinced
Yet she remains unconvinced that copper prices will rise as high as Citibank are forecasting. "I believe that prices will stabilize over the coming twelve months and will rally closer to the $2.80/lb mark [equivalent to around $6,173 per metric ton]. It is too early to predict that the price will recover to the levels seen at the start of 2014 but if supply disruptions continue to materialise, then it will bode well for copper. Having said that, I still believe that we will see a surplus in the market over the next two years."
Mothersole's predictions see the price remaining even lower (just under $5,700 per metric ton by the end of 2015) than Araneda forecasts. "People have been talking about the decline in pricing causing production cuts, but what I think is absent from the conversation is the need to evaluate consumption growth forecasts," he explains.
"And what has been noteworthy over the past year and a half or so in our country forecasts is that consumption growth forecasts have also been revised down."
Looking at China specifically, Mothersole doesn't believe consumption could get any stronger. "Chinese apparent consumption of copper is today running at around 17-18% year over year and that kind of real estate or construction investment can't continue to go at the pace that it is. Moreover, there's already material to account for the grid investment in China today [the country has announced "record investment" plans for 2015]. We shouldn't expect a big boost in Chinese apparent consumption - it's just not going to happen," he emphasises.
Long-term optimism for the red metal
In conclusion, Mothersole agrees that production cuts do need to be taken into account when forecasting copper prices but that this trend must also be balanced with what's happening on the consumption side. "When you put the two sides of the market together, it supports our fundamental view of a modest surplus developing as we progress further through 2015," he says.
But what about further into the future? For both Mothersole and Araneda, things will - eventually - start to improve. "In terms of a longer-term outlook, I am quite optimistic about copper pricing. Barring a collapse in Chinese demand, I believe that prices will recover as we move back into an excess demand scenario in 2017-2018," Araneda predicts, with Mothersole - albeit slightly less optimistically - agreeing.
"We do see prices eventually beginning to rise but it's a very muted increase at least over the near-term because we continue to see this modest surplus condition, which restrains prices. However, we do see global consumption growth improving and we do see the global economy slowly getting better - this supports a small uptake in pricing, which is what we have in our forecast up to the end of 2016."