As we discussed previously in this series, China’s copper demand has been better than expected this year, thanks to more infrastructure spending by the Chinese government and higher construction activity in the country. But investors should also pay close attention to the supply side of the equation.
Factors affecting supply
Copper supply has been in control this year based on several key factors. Producers like Freeport-McMoRan (FCX) and Glencore (GLNCY) announced production cuts last year in response to falling metal prices. But there have also been unplanned outages, such as in Las Bambas, Peru, where protests by local communities halted production. Freeport’s Grasberg mine also faced labor disruptions in 3Q16. Notably, Rio Tinto (RIO) (TRQ) is Freeport’s partner at the Grasberg mine.
Another key factor affecting copper supply is falling ore grades. BHP Billiton’s (BHP) Escondida is a case in point, wherein lower grades have negatively impacted production profile.
Given current metal prices, however, miners are not investing in new exploration projects. Although some previously announced projects are still underway, new greenfield projects are at a virtual halt, which means that copper markets could reach a deficit much sooner than many analysts expect.
In an interview with Metal Bulletin, Freeport’s management said that expects a “very severe” deficit in 2018. (Here we can define deficit, simply, as demand in excess of production.)
If copper moves to a deficit by 2018, copper prices would get a natural boost. Remember, copper has been plagued by rising supply and subdued demand for the past few years, and if we see trade wars under Trump’s administration, global economic activity could be jeopardized, and copper prices could come suddenly under pressure.
You can visit Market Realist’s Copper page for ongoing updates on this industry.