How Has Copper Performed in 2017
Copper has displayed a remarkable growth in its price in 2017, reaching a 3-year high of $7,061/mt in October (seen in the chart below). Copper prices have outperformed this year owing to a combination of supply and demand factors surrounding the non-ferrous metal. Copper prices have surged 17% YTD and we shall be discussing the major factors which have driven the price of the red metal throughout the year.
Structural Change and Strong Demand from China
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The surge in the metal price can majorly be attributed to the structural change implemented in the Chinese economy, which consumes roughly 50% of the world’s copper produced. The Shanghai Metals Market (SMM) had confirmed from Chinese officials that the country plans to ban the import of scrap copper by the end of 2018. [1]
Scrap copper which is imported to China, is required to be converted into refined copper for its industrial usage and thus results in materially polluting the environment. As a result of an increase in likelihood of this ban, the market anticipated an increase in demand for refined copper from the country, which resulted in a rally of copper’s price in the second half of the year.
As per the latest data released, China’s import of unwrought copper stood at 470,000 tons for November, up 20% since October. [2] Although, this increase in imports can be attributed to various intermittent factors, including the impact of a week long holiday in October. The increase is also indicative of the possibility of China’s stockpiling ahead of the expected ban and a strong demand condition prevalent in the country.
Fall in Supply from World’s Largest Copper Mines
Disruption in supply from two of the world’s largest copper mines has resulted in a global fall in the supply of copper. Workers in Escondida had initiated a 43-day strike in the beginning of this year which had resulted in a decline of 5% output from the world’s largest mine. This strike was initiated against the layoff introduced in the mine in order carry out the mine’s activities in a sustainable and safe manner. ((Global refined copper market shows 50,000 mt deficit for January-August: ICSG, S&P Platts))
In addition to that, the world’s second largest copper mine, Grasberg, saw a fall in output due an export ban imposed by the local government (between Feb-April) in order to enhance mineral processing within the country. Output from Grasberg fell by 15% as a result of this ban. [3]
Fall in output from two of the world’s largest mines had created an environment of global copper deficit and thus supported an increase in copper prices as demand remained intact.
A Weak U.S. Dollar Supported Copper Prices
Apart from the aforementioned factors, a fall in the dollar index (value of the dollar against a basket of six foreign currencies) also supported global copper prices as a weak dollar makes copper more affordable with respect to other currencies. The dollar remained weak in the second half of the year as a result of the uncertainty pertaining to President Trump’s legislative agenda with respect to the implementation of the U.S. tax reform and planned infrastructure spending of $1 trillion. Additionally, the strengthening of the Euro due to improving economic conditions in the country had also led to a fall in the value of the dollar.
What to Look Out for in 2018?
Strong copper prices remained beneficial for major copper producers such as BHP Billiton and Freeport-McMoRan who reported a significant increase in their revenue despite a disruption in their operations faced during the year. However, the factors discussed above are short lived and makes the projection for copper prices in the upcoming year uncertain. In the following article, we shall be discussing the outlook for copper in 2018 and the possible upside/downside for its price in the upcoming year.
Have more questions about Freeport? See the links below.
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