There’s a compelling case for copper to suddenly follow zinc’s epic trajectory two years ago
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Copper is on a tear in 2019 but it could be sign of a bigger things to come.
The problem is, when it does take off, who’s going to be ready for it?
MineLife director Gavin Wendt said the current price action reminds him of zinc prices a couple of years ago, which soared more than 250 per cent in less than two years.
Back then, it was about a looming supply deficit, but nobody knew when the pressure would actually release.
Sound familiar? Then let’s take a look at copper right now.
Copper has rallied over 10 per cent this year to US$6,457.50 ($9039.50) per tonne — its highest level since early July last year.
The recovery has been driven by more positive market sentiment generally, and for copper specifically, the belief that more supply is needed, right now, to satisfy demand.
The LME’s copper numbers show a drop in warehoused material from 385,000 tonnes at this time last year to about 133,825t today.
Other exchanges show a similar trend.
It’s a simple case of demand exceeding supply growth — and there isn’t a whole lot of latent supply to fill this gap.
“Normally, when refined copper stocks get tight, higher prices bring out extra supplies of scrap, both for re-refining and for direct use in semi-fabricating, which usually keeps a lid on cathode prices,” Roskill says.
“But this time round, the extent to which scrap can ease the cathode market is hindered by the Chinese scrap import restrictions, meaning that not all of the extra scrap emerging can be processed.
“The looming period of seasonal demand strength could get very interesting.”
Most analysts have significantly underestimated China’s appetite for copper and the likely rate of refined consumption growth in 2019, Roskill says.
“China continues to buy aggressively, hoovering the world of relatively affordable copper units (compared to the past decade) to feed its ever-expanding smelting and refining industries and the rising scale of its consumers,” Roskill says.
And if this wasn’t enough, significant production problems are piling up, squeezing existing supply.
Two Chilean smelters are down as they seek to meet new emissions legislation.
Other smelter problems in the Philippines and Indonesia mean “output losses are now unavoidable”, Roskill says.
Miners in Chile and Peru have been battered by heavy rain, while African miners have announced production cutbacks due to lower cobalt prices and new mining taxes and royalties.
Details aside, the fundamentally bullish outlook for copper hasn’t changed for quite a while.
In early 2018, copper markets looked strong and the long term outlook was positive — before a confluence of factors (Trump, trade wars, Brexit) crushed copper alongside nearly every commodity in the second half of the year.
So far this year some of that market uncertainty has evaporated, MineLife director Gavin Wendt says.
Investor sentiment is buoyed again by the sense that the US-China trade war could be on its way to a resolution.
“There’s a feeling that something is going to come out of the US-China trade negotiations,” he told Stockhead.
“There’s too much at stake for both countries.”
Copper producer Aeris Resources (ASX:AIS) just released a rough set of results, impacted by the copper price in the second half of 2018.
But the market right now is very good for them.
“We’ve seen the price going up quite significantly over the last week or so, which is quite exciting,” Aeris Resources executive chairman Andre Labuschagne told Stockhead.
“I do think where [the price] is heading is where we always thought it was going to be.
“All the forecasts indicate that these sorts of levels were always going to come up.”
“It was really the US-China trade war which put pressure on the market, and it’s quite exciting to see that there’s been some movement in those areas.”
But there’s the issue; prices are driven by sentiment, which is driven by near term, often unrelated factors. These headwinds can be hard to predict.
“You have a situation where educated people are saying ‘I’m looking at this very positive theme in the copper business – I see long term demand is up — but the price doesn’t bear any resemblance to that’,” Mr Wendt says.
Zinc followed a similar cycle six or seven years ago, Mr Wendt says.
“If you sat down with a company operating in the zinc space they would tell you about the looming zinc supply deficit,” he says.
“The years ticked by, and we got closer to this looming supply deficit — but nothing really happened with the zinc price.
“It was clear as day something was going to happen.”
Eventually the zinc price did climb, very strongly, in a short period of time.
“You could talk to stockbrokers — ‘this is the situation; you have to look at zinc companies because there’s going to be a shortfall and the price is going to react’,” Mr Wendt says.
“Stockbrokers and other market participants just didn’t react; because they know how markets work.
“Prices are driven by sentiment and speculation.
“I think the copper market is a little bit like this at the present time.”