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Copper: Experts Predict the Bull Ride to Continue in 2018

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Copper: Experts Predict the Bull Ride to Continue in 2018

The price of copper appears to be oblivious to the changing of the calendar. The red metal is acting like it is 2017 all over again!

Copper closed the last full week of 2017 1.85% higher on the week and closed around the $3.30 level. Reuters reports this morning that London copper was pushed even higher in early morning trading on bets that demand in top consumer China will improve in 2018, keeping prices near four-year highs at the start of trading in the new year. This after China’s copper smelters took action Friday to lower the floor for their treatment and refining charges by 8.4% in the first quarter of 2018, signaling tighter supply of copper concentrate in the first three months of the New Year.

Three-month copper on the London Metal Exchange ended 2017 with an annual 31% price gain, reaching prices last seen in January 2014 after peaking at $7,312.50 on December 28, according to Reuters data.

Expert Analysis

Frequent tED contributor Andrew Hecht of Seeking Alpha weighs in on 2017 with an eye on the year ahead, “The path of least resistance for copper will depend on Chinese economic growth and the path of least resistance for the dollar over coming weeks and months. Right now, China’s economic data is strong and the dollar is heading back towards the early September lows. All systems look bullish for copper and other industrial raw materials.”

Hecht seems almost prophetic as he gave us this input prior to last week’s four-year high for copper. “In 2017, the climb has been slow and steady, the only spikes were to new highs as technical traders who took short positions ahead of resistance levels rushed to close risk positions. The next significant level is at the 2014 high of $3.2745 per pound which we could see given the dollar and Chinese economic data. Copper looks good here going into 2018. However, the geopolitical landscape remains a mess and there are issues in Asia, the Middle East, and other areas of the world that could quickly cause a risk-off environment. Copper will not be immune to selling across all asset classes during periods of volatility.”

Rick Rule Reflects on the Red Metal

tED also sat down with Rick Rule of Sprott Global Resource Investments Ltd. And talked about the state of commodities with a focus on copper. Here are his thoughts, uninterrupted:

“For industrial materials, 2017 worked out pretty much the way we at Sprott thought it would. We didn’t see strong increases in demand, although we may have seen some inventory builds in China. What we did see is pricing firm as a consequence of supply weakness. Supply weakness in materials like copper and zinc and nickel and oil really was a consequence of three or four years of industry pricing where industries sold products for less than their cost of production. That meant there was a deferral of sustaining capital investment and a lack of new productive investments.

“So, we see the strength that we witnessed last year in the copper price more as a function of supply imbalances than strong demand. We see the supply imbalances continuing in 2018 in copper as an example on a global basis. We are relying mostly on very large mines that have been in production for a very long time. Mines that are long of tooth – those mines include things like Escondida and Grasberg, El Teniente and we see a dearth of new mine development and we also see very limited sustaining capital investment at major mines around the world. With these great mines at, or beyond, peak production, with sustaining capital deferrals, we see a declining ability to maintain current production levels, and hence, supply tightness – not a demand-driven pricing story.

“Simultaneous with that, we are seeing just glimmers of light in terms of a global economic recovery. I, myself, am not optimistic enough about the global economy given increasing disputes between trading blocks to say that demand will recover on a global basis, or even that the global economy will recover. But, if demand maintains its current level in the face of the industries inability, or unwillingness, to make sustaining capital investments, or new productive capacity investments, I think that one has to be fairly bullish, not strongly bullish, but fairly bullish about the pricing environment for a variety of industrial mineral commodities in 2018.

“I look at these big mines around the world, like Chuquicamata, which is a huge mine – CODELCO (the National Copper Corporation of Chile) acknowledges that internally they have $18-20 billion in sustaining capital investments to make in Chilean copper, but they don’t have the money. The Chilean state is de-capitalizing CODELCO. Which means at mines like El Teniente and Chuquicamata that the sustaining capital investments are not being made. At Grasberg in Indonesia, the Indonesian state is trying to take control of that deposit, so obviously, Freeport and Rio aren’t spending a whole bunch of money on sustaining capital. At Olympic Dam, the sustaining capital investments that need to be made in that mine aren’t being made in the current copper price environment – that’s just to name three. Those are all mines that are extraordinarily important on an individual basis in terms of copper supply globally. None of them are at a place where they are going to be able to increase their copper supply with the exception of Olympic Dam. They are all mines that require substantial sustaining capital to maintain their copper production over the next 10 years. In each case, the sustaining capital investments have been postponed. So, we see that as being fairly important in the case for reasonably strong industrial prices for the next three or four years.”

Further Reading

Andrew Hecht – Seeking Alpha: Base Metals 4th Quarter 2017 Review and Outlook for Q1 2018

Fast Markets – 2017 Review: Copper rebounds this year fueled by Chinese Stability

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Jim Williams

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