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Sentiment on coal and iron ore markets are almost uniformly negative, recent rallies notwithstanding. At the same time everyone is singing the praises of zinc, nickel and even lowly lead.
As for bellwether copper. Well, it’s somewhere down the middle. The copper price has recovered from five-and-half-year lows struck in January but at around the $2.70 a pound / $6,000 per tonne level is down double digits from this time last year.
Sentiment aside, the outlook for the price of the metal based on the fundamentals of the industry is uneven too.
Most analysts believe demand will moderate but continue to grow at a pace of around 3% – 4%, helped by still robust, albeit slowing, demand from China which consumes 45% of the world’s copper.
But on the supply side is where things start to get murky.
The majority of analysts expect copper to move into a surplus this year with as much as 400,000 excess tonnes on the market.
Others, like Christine Meilton, principal consultant on copper supply at commodities researcher CRU Group, predict a tiny deficit this year, before a shift to more substantial surplus of 260,000 tonnes next year.
There is little consensus about 2016 too with investment bank Citi for one predicting a deficit next year.
The copper industry has a long history of these supply-side surprises.
Typical disruptions associated with adverse weather, technical problems, power shortages or labour activity coupled with falling grades and dirty concentrates at old mines make forecasting a tough proposition.
Add to those factors project deferrals, commissioning delays, slower ramp-ups, mothballing and downsizing of mine plans due to the declining price environment of the last two-three years and it becomes easier to understand why forecasts are all over the place.
Meilton says CRU allows for an annual disruption allowance at the beginning of the year of 6% – 7% which is then adjusted on a quarterly basis throughout the year. The consultancy also allows for a 3.5% swing in refined output.
Last year saw a number of unforeseen events, including the dispute in Indonesia about copper export taxes, impacting supply patterns while Q1 2015 brought its own surprises.
Top producer Chile swung from severe drought to the country’s worst floods in 80 years in March shutting down mines with a combined 1.6 million tonnes of capacity while a massive mill failure at Olympic Dam in Australia will take 70,000 tonnes off the market.
However, Meilton doesn’t think more frequent supply disruptions are necessarily a trend: “The Chile floods did not amount to a huge loss of copper – probably around the 50,000 tonnes mark. It had disrupted logistics so there may be delays getting it to market. Olympic Dam in terms of global output [of 20 million tonnes] will not have a dramatic impact on supply.”
CRU expects to see the copper price continue to make modest gains over the remainder of the year as demand recovers from the seasonal first quarter low. “Q1’s almost always bad, people always get gloomy but generally the price does come back. Today’s price is at or near a bottom and new projects definitely need a price above $2.70,” says Meilton.
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“Our short term forecast is the price rising through the decade. Prices have typically been above the cost curve in the past although the price this year is biting into the cost curve,” says Meilton
An emerging tightness in 2017, driven by deficits in the raw materials markets, will support a higher price in 2017. Thereafter the price will continue to improve due to the deficit market, moving above $8,000 a tonne ($3.60 a pound) in 2019 says Meilton.
“Copper mining is getting more difficult. The best deposits have been discovered and exploited. As a rule grades are higher at current operations than at projects, which means costs are higher. There is no Escondida out there, at least it hasn’t been found yet,” says Meilton adding that the long-term incentive price for new projects is now north of $3 a pound and that prices oscillates around the long term marginal cost.
After 2020 Meilton is less sanguine about the price: “The trigger for a downward adjustment in the price going into the next decade will be the levelling off of Chinese demand growth which has slowed down significantly already. It could even start to decline during the middle of the next decade.”
And how about the often touted idea that India will take up China’s baton to become the new engine of growth for commodity markets?
“India can certainly start taking up the slack of China and we are forecasting growth rates of 7.5% between 2015 and 2035 on the subcontintent.
“It’s the strongest region in the world but it is coming a low base of course – currently consumption is only half a million tonnes. That compares to China current rate of just under 10 million tonnes a year.”
