Why Copper Prices Will Remain Subdued For The Rest Of The Year
London Metal Exchange (LME) spot copper prices currently stand at levels of $4,700 per ton, around 15% lower than the average for last year. [1] Despite rising above $5,000 per ton earlier in the year, we do not expect prices to rise significantly from current levels for the rest of this year. A combination of weakness in demand and excess supply are likely to preclude significant upward moves in copper prices for the rest of the current year.
Weakness in Chinese Manufacturing Activity
China is the world’s largest consumer of copper, accounting for over 40% of global consumption of the commodity. [2] The slowdown in Chinese manufacturing activity, reflected in the Manufacturing Purchasing Managers Index (PMI) data shown below, has weighed on Chinese demand for the commodity.
Despite the Chinese government’s fiscal stimulus, Chinese Manufacturing PMI exceeded 50 (which indicates expansion in manufacturing activity) in only one month so far this year. As copper is a metal with diverse industrial applications, weakness in Chinese manufacturing activity has translated into weakness in Chinese demand for the metal. The weakness in underlying demand is indicated by surging stockpiles of copper, with inventories monitored by the LME currently at a ten-month high. [3] The weakness in underlying demand is also reflected in a slowdown in Chinese copper imports. [4]
Excess Supply
In the backdrop of weakness in demand, a ramp-up of copper production by miners globally is likely to lead to a situation of supply outstripping demand. [3] Production increases from copper miners seen in the first half of the year are indicative of this looming oversupply situation. [3] Given the looming oversupply situation, we expect copper prices to average close to 15% lower year-over-year in 2016. Moreover, the upside for prices will remain limited in the near term, as indicated by our forecasts for Vale’s average realized copper prices, which mirror our expectations for copper prices.
Have more questions about Vale? See the links below.
- Vale’s Full Year 2015 Pre-Earnings Report
- Vale’s Q4 2015 Earnings Report: Decline In Iron Ore Prices Negatively Impacts Results
- How Important Is China To Vale’s Iron Ore Sales?
- What Is China’s Share Of Vale’s Overall Revenue?
- What Is Vale’s Revenue & EBITDA Breakdown?
- What Is Vale’s Fundamental Value Based On 2015 Results?
- By What Percentage Has Vale’s Revenue & EBITDA Declined Over The Last 5 Years?
- By What Percentage Can Vale’s Revenue & EBITDA Increase Over The Next 3 Years?
- How Has Vale’s Revenue Composition Changed Over The Last 5 Years?
Notes:
- LME Copper Prices, LME Free Data Service [↩]
- China is the world’s largest consumer of most commodities, Business Insider [↩]
- Hedge Funds Bail on Copper as Goldman Sees ‘Supply Storm’, Bloomberg [↩] [↩] [↩]
- China copper imports ease in June, but still strong, Reuters [↩]