Previously in this series, we saw how copper’s supply and demand could play out in 2016. From an investor’s perspective, it’s also important to look at the market balance after adjusting for the supply and demand.
Markets are said to be in deficit when demand exceeds production and markets enter surplus when production is more than demand. In this part of the series, we’ll explore whether copper markets could enter a deficit in 2016.
In its October 2015 release, the ICSG (International Copper Study Group) noted that it expects copper demand to outpace refined copper production in 2016, pushing the market into a deficit. In its earlier estimate, the ICSG had estimated a production surplus of 230,000 metric tons for 2016. The graph above shows ICSG’s 2016 estimates.
However, the ICSG also added a note of caution in its forecast, stating that “actual market balance outcomes have on recent occasions deviated significantly from ICSG market balance forecasts due to unforeseen developments.”
The ICSG estimates are based on expected apparent demand growth of 4% year-over-year in China and 2% in the rest of the world in 2016. Now, the expected copper market deficit could slip into a surplus if Chinese copper demand fails to live up to expectation. In our view, there’s more downside risk to China’s copper demand.
Goldman Sachs, which holds a bearish view on copper, expects copper markets could be in surplus between 2016–2019, according to a Bloomberg report. If copper markets remain in a surplus in 2016, as they have been for the last few years, we might see further pressure on copper (DBB) prices. This would negatively impact copper producers such as Freeport-McMoRan (FCX), Teck Resources (TCK), Southern Copper (SCCO), and Glencore (GLNCY).
Meanwhile, cost deflation could also keep copper prices lower in 2016, which we’ll explore in the next part of the series.