Will Copper Demand Increase In 2017?

Copper futures in China rose 6% in a bullish day of trading on Nov. 23. Overall, industrial metals in the world’s second-largest economy are showing tremendous promise with iron ore gaining 5.8%, while steel, zinc and aluminium also rose sharply. The rally in industrial metals began earlier on in 2016 after supply-side reforms were adopted in China. However, the Chinese are clearly betting big on Donald Trump’s massive infrastructure stimulus plan slated to take shape in 2017.

Trump has promised to rebuild America from the ground up, including roadways, bridges, schools, airports and other facilities. Fiscal stimulus worth trillions of dollars will invariably result in high demand for industrial metals such as copper. Commodities traders across China are also buoyed by their country’s 5-year strategic plan to cut capacity. Demand optimism for copper is increasing with hopes of massive infrastructure spending in the US. As at November 24, 2016, copper for delivery in December was priced at $2.6575 per pound, up 1.92% or $0.05.

Speculators Having a Field Day with Copper

Speculators in the US are driving copper futures higher, with the metal priced at $2.5210 per pound on the Comex for delivery in December. Copper has been hovering near its highest levels in 1 year plus. It’s not only copper that is set to benefit from Trump’s infrastructure plan, it’s raw materials overall. Rising copper prices are being boosted by falling inventory levels in China. The world’s #2 largest economy is also the world’s biggest consumer of copper. Plunging inventory levels are reflective of rising prices. With copper inventories being removed from warehouses, it is clear that metal is now ready for consumption.

China and the US are the most important drivers of demand for copper. That an improved economic outlook for China is now evident is good news for copper. The Chinese government has ambitious plans for infrastructure expenditure and this will boost demand for copper. For the short-term, day traders can take heart that the majority consensus among analysts is bullish for base metals like copper. Long-term, there is an opinion that the fundamentals will not support the massive interest in copper. JP Morgan analysts believe that a market correction will result once the smoke has cleared.

Base metals overall have been bullish. Zinc rose to $2,607 per tonne (up 5.5%), lead traded at $2,195 per tonne, up 4% and nickel gained 0.5% to trade at $11,260 per tonne. The big news of the month is copper with 14% appreciation in November. It is now trading well above $5,500 per tonne. Conventional wisdom suggests that copper was a poor performer, but its widespread usage is fueling speculation that fiscal stimulus will be good for the copper price. The incredible optimism in growth prospects in the US and China is driving copper prices off the charts. Its widespread usage in consumer appliances, wiring, power supply and construction is causing it to rally. Analysts across the board, including Goldman Sachs are now extremely bullish about copper. Copper demand averages around 23 million tonnes per annum, but there is talk of a deficit in copper availability to the tune of 400,000 tonnes next year.

Copper the Laggard – No More?

If copper shortages take place, the price will continue rising. Since China is the #1 largest consumer of copper, the 19th National Congress of the Communist Party is an important event to look out for. China will want to invest heavily in infrastructure development as part of its economic plan. With prices as high as they are, major mining companies like Glencore plc and Anglo American will be enjoying windfall profits. A definite tightening in markets has taken place with the turnaround strategy in China, and fiscal investment in the US. Copper’s performance of late has been lackluster. While zinc gained 55% and aluminium gained 17%, copper was only up 5%.

Beijing is seen as the most important reason for the rapid appreciation of the copper price. Demand is significantly boosted as China continues to drive credit expansion in the economy. An unlikely reason for an appreciation in the copper price is production cuts. In Q3 2016 major copper mining companies including BHP Billiton slashed their guidance for 2017. Copper is an exceptionally difficult metal to produce, and this typically results in up to 5% losses in mining output every year. Outages are a big reason for this. With a tightening in copper markets (demand is rising and supplies falling), prices are now picking up. Copper inventories levels in London have plunged by 36% since the end of September. This is also evident with the SFE (Shanghai Futures Exchange).

Copper Inventories Running on Flat

While many believe that US infrastructure expenditure will drive up the copper price most, it is China that controls the price movement of this metal. The vast majority of base metal demand comes from Asia, notably China, while a minimal demand is US-based. The Financial Times reported that a copper executive is anticipating an increase in production from 8 copper mines, but this will be offset by 400,000 tonnes of declines in copper inventories. From the demand side, it is uncertain what shape infrastructure expenditure will take in the US. In any event, the lag effect will prevent any clarity until at least 2018. Copper futures traders are going long on the metal now, in anticipation of an uptick in demand and a shortage in inventories.

To cut a long story short, the most important driving force behind the copper price is not the US, it is China. The Chinese are expecting solid growth demand for copper in the region of 3% – 5%, on the back of massive government stimulus. The new copper price is likely to hold, and if it falls, buyers will rush in to keep the price steady.