TORONTO (miningweekly.com) – Notwithstanding an expected copper price rally during the second half of the year, a recent report by Bank of America Merrill Lynch’s (BofAML’s) global commodity research team hinted at the price of the red metal falling below this year’s estimates in 2017, citing cyclical headwinds hindering a sustained rally.
The group maintained its cautious view for 2017, with prices likely averaging $4 747/t ($2.15/lb), lower than this year's quotations at $4 882/t ($2.21/lb).
BofAML pointed to the potential reversal of globalisation as a severe risk, owing to copper prices being so closely linked to the strength of global trade.
Researchers suggested that globalisation had benefited both developed and emerging markets as higher commodity demand from China caused one of the biggest bull markets in the past decade. “Yet, the Brexit decision was a vote against the status quo that has been in place since WW2. While the UK, as such, may not be important enough for commodity markets, [the Brexit vote’s] dynamics pose risks to cyclical growth, as macroeconomic uncertainty has increased; a reversal of globalisation would also be a structural hindrance to activity,” BofAML analysts stated in its ‘Global Metals Weekly’ report.
For this reason, the bank had recently raised its gold price target.
The BofAML economics team had lowered their growth forecasts on the back of Brexit and, factoring the new expectations into its supply/demand models, the message was clear: commodity demand growth was under pressure.
“Against this backdrop, we follow dynamics, including consumer confidence, closely to evaluate where the sector is headed. Despite these headwinds, it is remarkable that the cyclical commodities have found a footing and rallied, even after Brexit,” analysts stated.
According to BofAML, its business-cycle model remained in the ‘recovery’ stage, which tended to be the most bullish period, especially for the base metals. Partially because of this, the bank had, so far, not changed its forecasts.
The research team pointed out that China was behind the recent price rally. Copper was again trading above pre-Brexit levels, which was partially influenced by investor flows. Further, while the Chinese copper market remained well supplied, it had stabilised, with physical premiums, for instance, finding a bottom.
Refined copper imports had returned to levels that were fundamentally justifiable.
“We also note data that suggests that the government is unlikely to wholesale withdraw stimulus. The Chinese Yuan Renminbi remains an issue, but we note that a weaker currency did not stop the copper rally through June, suggesting that relationships between currencies and commodities have changed.”
The analysts also reported that the scrap market was reasonably well supplied in China, helping to push refined output higher there, despite it remaining tight in the rest of the world.