Overview:

• Copper prices have unwound most of the gains that followed last November’s US election and the March quarter supply disruptions from major mine strikes. The LME cash price sits around US$5700/tonne at the time of writing, down from a high of around $6100/tonne reached in mid February. We forecast the market to be largely balanced or in small deficit in 2017 and 2018, with prices moving sideways given uncertainties on both the supply and demand sides.
• Some of the world’s largest copper mines faced supply disruptions earlier this year, including a six week strike at Escondida, the world’s biggest copper mine, and a ban on exports in Indonesia which saw Freeport’s production and shipments fall. While these disruptions have been resolved and operations returned to normal, the ongoing dissatisfaction among workers over contract conditions (which were settled during a period of low prices and low profitability) could see them strike again. Weather is also a factor that could cause disruptions, given many of the mines are in areas prone to cyclones and flooding. Going forward, supply disruptions are likely to remain an ongoing issue. Companies seem to be getting better at managing worker demands, however, weather factors are harder to manage. While these risk factors are known and have been somewhat priced in, uncertainty about the extent of future disruptions could still have an impact on prices.
• Demand growth in China, copper’s biggest consumer, is expected to slow gradually. Construction activity has remained stronger than expected, however our view remains that it should gradually slow due to tighter regulations and policy restrictions aimed at tightening the housing market. US demand is expected to improve, especially given the proposed large infrastructure spending. However to date little details have been revealed on Trump’s infrastructure package and the market less sure about whether such measures will pass in Congress. Given that the size of US copper demand is dwarfed by Chinese demand, any increase in US spending will be more of a support to sentiment, rather than changing the demand picture substantially.
• In the meantime, large quantities of copper tied up in Chinese bonded warehouses pose significant upside risk to supply, especially given the narrowing interest rate differentials which could see copper carry trades unwound and inventory released into market.
• Given uncertainties on both sides, we forecast the refined copper market to be balanced (or in small deficit) in 2017 and 2018, with prices moving sideways, averaging at US$5720/tonne.

For further details, please see the attached document:

• NAB Copper Outlook: June 2017 (PDF, 514KB)