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2018 copper prices revised downwards, but spot levels still bullish

28th September 2018

By: Natasha Odendaal

Creamer Media Senior Deputy Editor

     

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Fitch Solutions has revised its 2018 copper price outlook downwards as third-quarter prices fell more than previously anticipated.

Despite the downward revision of the forecast price from $7 000/t to $6 700/t, the group remains bullish about spot level prices and expects a recovery in prices during the rest of the year, as the company believes the copper price “rout” overshot fundamentals.

“The escalating trade dispute between the US and China, rising global protectionism, as well as a stronger US dollar, reinforced by emerging market weakness, resulted in a drop of more than 20% in copper prices between June and September 2018,” the group says in its latest research bulletin.

The correction is believed to be sentiment-driven as copper fundamentals remain largely tight and global consumption continues to outpace production.

Fitch Solutions forecasts a short-term global refined copper deficit of 251 000 t in 2018, driven by sustained Chinese copper demand as the country’s copper scrap import ban bolsters the higher imports of refined copper.

“Over the longer term, we expect the global copper deficit to gradually shrink and the market to be broadly balanced over 2024 to 2027, as strong prices incentivise producers to ramp up output and invest in new projects,” the latest Fitch Solutions outlook report shows.

Fitch Solutions indicates a 5.3% year-on-year growth in copper consumption from China over the first half of 2018, with stronger Chinese demand expected in the second half of 2018, as authorities are expected to resume support for the infrastructure sector through tax cuts and greater project approvals.

Other high-frequency indicators also point to a tightening global market, supporting the view that 2018 will end with higher copper prices.

“For instance, the spread between London Metal Exchange (LME) cash and three-month copper prices jumped to a negative $16.3/t on September 12 from a low of $40/t in August. Additionally, stocks at LME warehouses continue to decline, dropping from highs of 38 000 t in March down to 22 000 t as of September 13, the lowest level so far this year,” Fitch Solutions highlights.

Further, the persistent global undersupply will keep prices on an upward trajectory to average $7 300/t by 2022.

Global refined copper demand will increasingly outpace production, as solid demand from China’s power and infrastructure sectors and rising global electric vehicle (EV) production deepen the global deficit over the coming years.

The global refined copper market is expected to remain in deficit until 2023, when the market will shift into a surplus.

Copper demand will increasingly benefit from the rise of the EV market – with global EV sales to grow fivefold between 2017 and 2027 to 5.1-million units – and the growing popularity of renewable energy sources.

The conventional internal combustion engine used in motor vehicles typically contains about 20 kg of copper, compared with 80 kg used in an EV.

“China’s power and construction sectors, which account for about 46% and 9.4% of copper end-use respectively, will keep demand growth elevated in the largest consumer of refined copper,” the group says.

China’s refined copper consumption growth rate will slow slightly in 2018, to 3.2%, as more stringent efforts to curb real estate speculation and relatively weaker public infrastructure spending growth weigh on the country’s metal demand.

Dominant Global User

Despite this, China will remain the dominant global user of copper by a significant margin, with consumption levels increasing from 11.7-million tonnes in 2018 to 16-million tonnes by 2027.

Meanwhile, China’s refined copper production growth will reflect a slight year-on-year slowdown to 4% this year, as tightening environmental standards result in outdated capacity shutting down.

“Our growth outlook for the country’s refined copper output remains muted by historical standards, increasing from 8.8-million tonnes in 2018 to 11.4-million tonnes by 2027, averaging 3.1% yearly growth,” Fitch Solutions points out, highlighting the noticeable slowdown compared with an average yearly growth rate of 9.2% over the previous ten-year period.

However, the escalating trade dispute between the US and China presents a key downside risk to Fitch Solutions’ forecast.

The threats by the US to implement a proposed increase from 10% to 25% on the tariffs on $200-billion of Chinese products over the next few weeks are unlikely to impact on short-term copper fundamentals.

However, it could result in further deterioration of market sentiment, posing downside risks to prices over the next few weeks.

“Copper prices are seen as an important indicator of global trade, so the deterioration of free trade between the two largest global economies is prone to impact copper prices negatively as investors shift away from risk-on asset classes such as commodities,” the group explains.

The new round of proposed tariffs will target electrical equipment or appliances coming into the US from China, which account for about 7.5% and 14.6% respectively of China’s refined copper end-use.

“The US is also the largest or second-largest importer of these Chinese goods, so the new proposed round of tariffs targeting these goods would weigh on these sectors and, in turn, China’s refined copper demand, although this would likely only impact market fundamentals well into 2019,” the group concludes.

Edited by Martin Zhuwakinyu
Creamer Media Senior Deputy Editor

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