VANCOUVER (miningweekly.com) – Bank of America Merrill Lynch (BofAML) does not expect the copper price to rally to $3/lb at least until mid-year, as a softer Chinese copper market and global policy uncertainty weighs.
After rallying by 28% in the fourth quarter of 2016, copper prices have held up in the first quarter of this year, rallying to a 52-week high of $2.79/lb on February 14.
According to a new Global Research report, the rally was heavily influenced by a series of production losses, which are annualising at 2.1-million tonnes so far this year, or 10% of supply, analysts said.
“To put this into perspective, we only need 1.1-million tonnes of unexpected disruptions this year for a small deficit. Digging a bit deeper, our supply tracker does not include additional losses from Escondida and Grasberg, where operations are currently disrupted,” the report stated.
The two mines, some of the largest in the world, are likely to come back on line this year, with various possible scenarios for a resolution of underlying conflicts. Notwithstanding, Escondida and Grasberg are two of only four mines that are forecast to contribute 80% to net mine supply growth this year, a tally that looks increasingly unlikely, BofAML analysts warn.
Meanwhile, the report cautions that, although opper prices have held up, it is peculiar that prices have not rallied more meaningfully in the year to date, given the magnitude of disruptions.
“Subdued price movements were, in our view, heavily influenced by the continued weakness of China's copper market, where inventories have been building, premia fallen and the import arbitrage has not been open,” BofAML said.
While a slow normalisation of activity after the Lunar New Year holidays is not unusual, the status quo inhibits sustained price increases for now. This is a key reason analysts expect copper not to rally to $3/lb until mid-year. Beyond that, the Global Research team notes that activity growth of several sectors in China has been slowing, with grid spending particularly soft of late. The gradual weakening of sectoral Chinese data is not an immediate concern; however, it suggests scope for copper to end the year at 2.15/lb, BofAML forecasts.
Further, BofAML noted that purchasing managers indexes (PMIs) remain high, but that economic policy uncertainty remains a downside risk.
“Beyond early signs that activity in China is slowing, we are also concerned about the increase of economic policy uncertainty to record levels. This is so important because rising policy uncertainty causes declines of manufacturing PMIs, a proxy for metals demand,” analysts said.
With US President Donald Trump set to address a joint session of Congress on February 28, the research team will be looking for key messages that may reduce uncertainty. China's yearly session of the National People's Congress will also start around March 5. While policy-making may not be the main focus of this event, economic targets should be communicated to the public and this may give an indication over the extent to which the government is willing to support growth, BofAML stated.