Expected Supply Deficit To Underpin Copper Prices

Analysts look for copper to start benefitting from a supply-demand deficit in 2019 after being held back during 2018 by issues such as worries about the U.S.-China trade war.

“We have been in a deficit position,” said John Gross, publisher of The Copper Journal and metals-industry consultant. “The inventories have continued declining, and yet the price hasn’t responded in any meaningful way to that.”

The longtime market veteran compared the situation to the 1980s, when the global economy was weak. Inventories were also low, but prices remained soft until around 1987.

And that, analysts said, is what should start happening next year, especially if the U.S. and China resolve their trade differences, thereby avoiding a protracted trade war that could otherwise slow the global economy and industrial metals.

Robin Bhar, metals analyst with Societe Generale, projected that copper will rise to $6,800 a tonne, or $3.08 a pound, in six months. He listed a 12-month outlook of $7,100, or $3.22.

“We would expect a gradual rise in price,” Bhar said, suggesting that price dips will be buying opportunities in a market that will be in a supply deficit. “A lot will depend on ongoing negotiations between China and the U.S.”

Worries about the impact of the trade war hurt industrial metals in 2018; thus a resolution should push copper higher, analysts said. “We would argue copper is oversold,” Bhar added.

Gross looks for copper to average around $2.95 to $3 a pound in 2019, or $6,500 to $6,600 for three-months copper on the London Metal Exchange.

Barclays sees copper averaging $6,263 a tonne in 2019, rising to an average of $6,550 in the second quarter. However, the bank then sees a retreat later in the year on slower economic growth. Commerzbank sees copper rising to an average of $6,800 in the second quarter and ending 2019 at $6,500.

Edward Meir, commodities consultant with INFL FCStone, projected a full-year average price of $6,190, although he looks for copper to hit a high for the year of $7,220. He commented that the market is “not overloaded” with copper stocks as it was back in 2015-16, yet weaker
demand from slower growth could replenish inventories by late 2019 and “keep outsized rallies in check.”

Bhar looks for global copper consumption to rise to 24.47 million tonnes in 2019 from 23.75 million this year. Meanwhile, he sees supply growing just 1.6%, below the 10-year average of 3.4%. He looks for the supply/demand deficit to rise to 270,000 tonnes next year, up from 50,000 this year.

“There will be further demand growth on the back of still-positive global GDP [gross domestic product],” Bhar said, adding that his firm expects global GDP growth of 3.7% next year.

Gross looks for global copper consumption and production to both rise by somewhere around 2% to 2.5% in 2019. Gross listed a copper supply/demand deficit of around 275,000 tonnes at the end of 2018. He looks for this to decline next year, but still envisions a supply deficit of around 50,000 tonnes, which comes close to what he termed a “balanced market.”

One of the keys for this market is the cumulative inventories of the Shanghai, New York and London exchanges, Gross explained. As of when he spoke to Kitco News, these amounted to less than one week of global copper consumption.

“It’s extremely low by any measure,” Gross said.

The trade uncertainty has held copper back, although the economy of No. 1 copper consumer China also has slowed, Gross said. There have been reports of a large number of apartments in the country sitting empty, and auto sales have slowed. The country’s manufacturing diffusion index has been hovering right around 50, roughly the dividing line on whether the economy is expanding or contracting, Gross pointed out.

“It’s not as robust as it has been. But certainly China is still the key to the copper and industrial metals overall,” Gross said. “So if trade relations can improve, that would be positive for their economy and the U.S. And we could see the copper market responding to that.”

Bhar commented that demand should be good for traditional uses of copper, such as transportation and the power sector. Another segment of the market that will become increasingly important is electric cars, Gross and Bhar reported said.

“It’s not only the car itself taking more copper, but also the infrastructure to support electric vehicles will take more copper,” Gross explained, referring to not only factories but recharging stations.

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