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What’s Copper’s Outlook as Supply Disruption–Fueled Rally Fades?

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Apr. 11 2017, Updated 7:38 a.m. ET

Copper prices

LME (London Metal Exchange) three-month copper contracts have risen ~4.0% so far in 2017, based on copper’s April 7, 2017, closing price.

In 2016, copper prices rose 17.4%, ending a five-year price drought. Although copper is trading with some yearly gains, it’s shed most of its 2017 gains. Copper prices closed at a high of $6,156 per metric ton on February 14, 2017. The markets seemed to lose their love for the metal after that.

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Supply disruptions

Having said that, the fall in copper prices hasn’t been without reason. There were production stoppages at major mines such as Freeport-McMoRan’s (FCX) Grasberg mine and BHP Billiton’s (BHP) Escondida mine. Freeport’s Cerro Verde mine also faced a labor dispute situation in March.

According to estimates from Thomson Reuters, ~200,000 metric tons of copper production had been lost due to production stoppages as of March 20, 2017. With supply issues at these leading mines over, copper lost some of its 2017 gains.

Outlook

Supply disruptions in 1Q17 were significant for copper, for which annual mined production is close to 20 million metric tons. Some copper producers such as Rio Tinto (RIO) expect copper to be in a deficit in 2017.

In our view, copper’s downside could be limited due to its projected deficit. In the near term, copper could outperform aluminum, which has seen a big spike this year. Meanwhile, copper investors should closely follow Chinese copper imports, as Chinese demand could be the wild card for copper in 2017.

Until now, we’ve looked at copper prices. In the coming parts of this series, we’ll see what the 1Q17 earnings season could bring for copper miners (GLNCY) (SCCO). Let’s begin by looking at analysts’ ratings and target prices for Freeport-McMoRan.

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