Cracks Appear on Bullish Copper View

Updated on
  • Stockpiles tracked by exchanges near highest since 2013
  • Barclays forecast 109,000 ton deficit this year on disruptions

Copper bulls ruled the market from late October to mid February as prices surged on rebounding Chinese demand and mine disruptions. Now, signs of oversupply are waking up the bears.

When asked about price prospects for the next six months, 15 analysts and traders surveyed by Bloomberg News were evenly split between bears and bulls, with one neutral. In China, bets on price declines outnumbered wagers on gains by the most since at least Dec. 19, data on the Shanghai Futures Exchange show, while money managers in London cut their bullish bets to the smallest in five months. A separate weekly poll on the metal’s immediate prospects turned bullish from mixed last week.

Divided opinions on copper’s next move set the stage for the industry’s annual gathering in Santiago next week. Typically upbeat producers will be pinning their near-term hopes on a seasonal rebound in demand while the bears will point to the end of a six-week strike at the Escondida mine at a time of rising inventories and an increase in scrap supply.

“For copper, you can’t get too aggressive either way,” Dane Davis, an analyst at Barclays Plc in New York, said in a telephone interview. “You can’t short the metal too much because of the supply side, and you can’t get long too much because the demand conditions aren’t looking great on a six-month basis.”

Combined inventories tracked by exchanges in Shanghai, London and New York have surged more than a third this year and are near the highest since 2013, supporting the argument that the market will remain oversupplied even after disruptions at Escondida and the Grasberg mine in Indonesia. Premiums paid for copper delivered in Yangshan port, near Shanghai, are approaching the lowest level in four years, suggesting weak imports seen so far in China this year won’t let up.

While forecasts in the Bloomberg six-month survey range from $4,409 to $7,000 a metric ton, most respondents, including the bears, don’t foresee prices collapsing.

In February, the metal used in wiring and plumbing climbed to $6,204 on the London Metal Exchange, the highest since May 2015, as Freeport-McMoRan Inc. suspended operations at Grasberg, while workers at BHP Billiton Ltd.’s Escondida remained on strike. The metal slid 1.5 percent to $5,867 at 11:50 a.m. London time on Friday.

While the rally has faltered, Chile’s copper agency raised its 2017 price forecast to $2.50 to $2.55, from $2.40 in January. The agency estimates the Escondida strike that lasted six weeks will curb the company’s production by as much as 230,000 tons. Grasberg’s output could drop to as little as 230,000 tons, missing the company’s January guidance of 650,000 tons, should Freeport not secure an export license this year, Citigroup Inc. analysts including David Wilson wrote in a note March 28.

Demand will rise 2.4 percent this year to 23.79 million tons from a year earlier, Barclays forecast in a report this week. Refined copper production probably will grow 1.2 percent to 23.685 million tons this year, it said. About 1.5 million tons of mining capacity has labor contracts that are still up for renewal this year, Davis said. Escondida workers invoked a provision allowing them to return to work using their old contract for 18 months, which sets up another round of wage negotiations next year.

Deficit Forecasts

Global output will trail consumption by 109,000 tons this year, after accounting for losses from potential disruptions, according to Barclays. That’s smaller than the 200,000 to 250,000 ton deficit seen by Chile’s copper agency.

“We expected it to end at some point and we are still are forecasting a tighter-than-previously expected market,” said Ben Ross, a New York-based co-portfolio manager of commodity strategy at Cohen & Steers Capital Management, which oversees $59 billion, referring to the Escondida strike. “We would be buyers on price weakness.”

In Peru, meanwhile, workers at a Freeport unit have reached an agreement with the company to end a three-week strike at Cerro Verde, the country’s largest copper mine, and union members will return to work on Friday.

While worries about supply disruptions persist, it will take a few months for the market to feel their impact, Edward Meir, an analyst at INTL FCStone Inc. in New York, said. Those concerns are overshadowed by rising inventories and declining premiums and investors have pared their long positions, he said.

In China, the government has toughened property curbs, hurting demand prospects for metals. Property transaction volumes in first-tier cities may fall sharply if the Chinese government steps up regulation, Fan Jianping, a research fellow with the State Information Center, said.

The outlook for demand from home builders is dimming at a time when the nation’s purchases are already weakening. In February, China’s imports of refined copper slumped 29 percent to 233,832 tons from a year earlier, while inbound shipments of concentrates fell, Beijing-based customs data show.

Questions over President Donald Trump’s ability to implement pro-growth policies, including $1 trillion in infrastructure spending, are also clouding the demand outlook for copper, after he failed to muster enough support in Congress to repeal and replace Obamacare.

Still, the prospect of a weaker dollar would support copper by raising production costs for miners, Ingrid Sternby, a London-based senior research analyst at Blenheim Capital Management, said in an interview. She sees prices averaging $6,000-6,500 a ton in the second quarter, as tepid demand seen so far this year starts to turn around.

"The right trade for the past year or so has been to buy these kinds of dips," she said.