2017 copper markets
As we noted previously in this series, the market’s opinion is divided over the 2017 copper market balance. Notably, the issues faced by copper are a bit different than what steel and aluminum are facing.
Although copper has also faced surplus production levels, the surplus isn’t as acute as with steel and aluminum. Small changes in demand or supply growth can push copper markets from a surplus to a deficit.
More than a supply-side surplus, copper miners (TCK) such as Freeport-McMoRan (FCX), Southern Copper (SCCO), BHP Billiton (BHP), and Glencore (GLNCY) have been hit by the slowdown in Chinese copper demand
Supply side factors
On the supply side, copper’s dynamics are different than those of other metals. Copper doesn’t face massive overcapacity like steel and aluminum, and miners need to replenish their falling copper reserves with new mines.
Also, copper mines have to be converted into underground operations once an open pit mine nears the end of its lifespan. These activities require a lot of cash, and companies need an incentive in the form of higher copper prices to pursue new exploration projects.
Given current metal prices, 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 expected. In an interview with Metal Bulletin, Freeport-McMoRan’s management said that it expects a “very severe” deficit in 2018.
In our view, although 2017 could be a close call for a copper market deficit, we could head toward a deficit by 2018 as a result of supply-side factors.
Meanwhile, investors in Freeport-McMoRan (FCX) should also brace for lower copper volumes in 2017. We’ll discuss this more in the next article.