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Copper Pricing Hammered by Trade Worries; Long View Appears Strong on Fundamentals

July 20, 2018
Current prices aren’t enough to spur development of new supply.

Copper prices have taken a beating over the past few weeks, in large part responding to concerns that global trade will be slowed by tariffs, but the longer-term outlook based on supply fundamentals has some analysts looking for a significant upturn.

Copper prices closed at $2.76 on COMEX Wednesday, around their level a year ago, after trading above $3 per pound for most of the past year. When we last saw these numbers copper prices were in the midst of a significant rise.

Often viewed as bellwether for the global economy due to its wide-ranging industrial applications, copper fell over 16% from its most recent peak of $3.30 in June. Copper traded on the London Metals Exchange (LME) is flirting in the past few days with a move below $6,000 per metric ton and has done so in intra-day trading. It closed at $6,152.00 on Wednesday, a low it hasn’t seen since late July last year, and likewise down 16% from June 7.

There are a host of reasons for the current softness in metals prices. Trade war concerns lead the list but have been intensified by disappointment in the outlook for Chinese economic growth, concerns about labor relations at BHP Billiton’s giant Escondida mine, and a rash of train robberies targeting copper shipments in the Atacama desert in Chile.

However, some metals analysts looking at the long-term fundamentals are forecasting significant improvement over the next 10 years, in part because current prices aren’t enough to spur development of new supply. A report from Citigroup cited by Bloomberg forecasts LME average annual copper prices to approach $8,000 by 2020 and $9,000 per metric ton by 2028 in its baseline scenario.

The market is entering a long period of deficits starting this year. The metal is getting more difficult and more expensive to mine, Citigroup said. “We find that current prices of $6,200 a ton are nowhere near high enough to enable the market to clear,” the analysts said.

Metals analyst John Gross, publisher of the Copper Journal, said in early June that copper prices on COMEX will reach $5 based on overall trends, and he stands by that forecast, but said in a recent note to subscribers that the near-term outlook remains ugly.

“The combination of trade tensions, and the stronger dollar hit metals pretty hard, and at this point, there is little on the horizon to suggest things will get better anytime soon,” he said. “Best to batten down the hatches, and hedge your bets till this storm passes.”