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Copper at a crossroads as recent price rally slows supply discipline

Copper at a crossroads as recent price rally slows supply discipline

Photo by Bloomberg

3rd June 2016

By: Henry Lazenby

Creamer Media Deputy Editor: North America

  

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TORONTO (miningweekly.com) – Copper market analysts maintain a cautiously optimistic view that the price of the base metal will rally during the second half of the year, despite a recent price pop having dented producers’ discipline.

A report published by Bank of America Merrill Lynch (BofAML) suggested that the copper market was rebalancing, as global supply growth slowed.

The less-bearish outlook was also one of the reasons that copper treatment and refining charges rolled over into 2016.

“In our view, the more constructive sentiment on the concentrates market was heavily influenced by operational issues,” stated the banking group’s global commodities research team.

After prices declined through 2015 to $4 310/t ($1.95/lb) earlier this year, several miners were forced to shutter inefficient operations. According to BofAML estimates, the run-rate of unexpected copper supply losses annualised at 6% for the year-to-date period.

BofAML advised that the impact of operational issues had been apparent in Chile, where Codelco's recent announcement of a 11% year-on-year output increase in the first quarter caused considerable apprehension. Yet, this increase was more than offset by lower output from BHP Billiton's Escondida mine, leading Chile's copper output down 3% year-over-year during the first three months of 2016.

So far this year, several copper producers had announced supply cuts and closures on the back of lower prices, including Capstone Mining, Jinchuan Group, Imperial Metals, Mawson West and Atlas Mining, which added to last year's supply-cut announcements from Glencore and Freeport-McMoRan.

BofAML pointed out that the recent copper price rally above $5 000/t ($2.26/lb) had led to a “remarkable” slowdown in production discipline, which was a concern, as the market would still need another 670 000 t in mine supply losses to have a balanced refined market this year.

The analysts pointed out that a rebound of treatment and refining charges pointed to the concentrates market having eased recently.

Taking into consideration scheduled production increases from large mines, including Las Bambas, Cerro Verde and Grasberg, BofAML saw limited upside to copper in the near term.

“In fact, another leg lower in copper prices may be necessary to incentivise further cutbacks. If this happened, and Chinese activity remained steady through [the second half of the year], copper should rally later this year,” analysts stated.

Meanwhile, a new report by research house BMI Research expected that the red metal would see a mild rebound over the second half of 2016, as production cuts supported a move off the lows of the first half of the year.

BMI analysts forecast a price of $4 900/t in 2016, representing the bottom of copper's multiyear price decline. Analysts expected the metal’s price to trend higher over its forecast period to 2020.

Edited by Samantha Herbst
Creamer Media Deputy Editor

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