In the previous article, we saw that copper has been in a deficit in the first four months of the year. The deficit has been led by the dual impact of supply and demand-side actions. Copper’s apparent demand has been better-than-expected this year on the rise in Chinese construction activity coupled with an increase in the country’s bonded stocks.
The supply side of the equation has also been somewhat supportive of copper prices. Along with the curtailments by companies like Freeport-McMoRan (FCX) and Glencore (GLNCY), weather-related disruptions in Chile, which is the world’s largest copper producer, have prevented the market from moving to a surplus. Chile’s copper production has fallen this year as can be seen in the graph above.
Having said that, we could see some moderation in copper demand in 2H16 as the impact of the Chinese surplus is slowly fading away. Also, the growth in bonded stocks has slowed down after the big spike earlier this year. On the supply side, we could see incremental supply coming out from Chile. These factors could push copper markets into a surplus in the second half of the year.
Surpluses in commodity markets tend to put pressure on prices. One of the factors supporting aluminum this year has been the projected deficit. Many primary producers like Alcoa (AA) and RUSAL believe that aluminum will record its first deficit in a decade this year. To be sure, global aluminum markets have been in a record first half deficit in 2016.
Copper’s surplus could continue to put pressure on prices this year. Having said that, we might not see copper breach the psychologically crucial $4,500 per metric ton level unless we see a major global sell-off. On the upside, $5,000 might be a crucial resistance level for copper.
You can also consider the Materials Select Sector SPDR ETF (XLB) to get diversified exposure to the materials sector. Together, Freeport and Newmont Mining (NEM) form ~6.5% of XLB’s portfolio. Alternatively, investors who want direct exposure to copper can also consider the PowerShares DB Base Metals ETF (DBB). DBB invests one-third of its holdings in copper.
You can keep track of the daily movement in commodity markets by visiting our Copper page.