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Copper Prices Rebound – Long-Term Expectations on the Rise

By Jim Williams

Copper prices hit a one-week high as a rally in oil and global equity markets raised hope for investors. That may not sound like much, but after the rough end of 2014 and the forgettable January 2015, this is encouraging news.

Copper for delivery in three months on the London Metal Exchange advanced 1.2 percent to $5,565 a metric ton ($2.52 a pound). In New York, futures for March delivery gained 1.4 percent to the same $2.52 a pound, while the metal for April in Shanghai rose 1.2 percent to close at 40,760 yuan ($6,514) a ton.

Copper has become a little more buoyant in recent days and experts believe the firmer oil price, if it continues, could provide even more of a boost. “Certainly the rebound in the energy markets has helped improve sentiment in general in the commodity markets,” said Daniel Hynes, a senior commodity strategist at Australia & New Zealand (AZN) Banking Group Ltd. “That’s certainly feeding through now into base metals.”

The global economy is still eating at investors’ willingness to go all in on the red metal. Copper prices lost 33.1 cents, or 11.72%, in January as concerns over the global economic outlook and the impact on future demand prospects dampened the appeal of the commodity.

Shares in Shanghai rallied more than 2% after Monday’s soft Chinese manufacturing data added to speculation that policymakers in Beijing may implement further stimulus measures to support the economy. Hopes that Greece’s new government would be able to reach a compromise with its international creditors on the terms of its bailout also helped lift sentiment. However, optimism over the health of the U.S. economy weakened after data on Monday showed that U.S. consumer spending fell at the fastest rate since September 2009 in December. Separate reports showed that U.S. construction spending rose less than expected in December, while manufacturing growth slowed.

World’s Largest Copper Producer Lowers Short-Term Expectations
Late last week the Chilean Copper Commission, known as Cochilco, lowered its expectations for the average copper price in 2015, to $2.85 a pound from the $3.00 a pound it forecast in October. 

Chilean copper production is expected to be 6 million tons this year, down from the 6.23 million tons Cochilco projected in October.

Every one-cent increase in the price of the red metal represents more than $40 million in additional revenue.

“The fall in oil prices, the strengthening of the dollar in international markets and the gradual slowdown affecting China’s economy led Cochilco to trim their expectations,” Chilean Mining Minister Aurora Williams said. “All these factors coincide with an abundant supply of metals that has exacerbated investors’ risk aversion regarding raw materials, precipitating the fall in prices,” she said.

The outlook isn’t all doom and gloom. Cochilco says the price should recover in the near future. Cochilco said it expected copper to recover during the second half of 2015 “once the price finds a new equilibrium as doubt about Chinese economic growth dissipates and investors reduce their aversion to risk.” But the commission warned that economic outlook for 2016 was not very positive and that a larger copper surplus could weigh on prices. However, from 2018 the global market would flip from surplus to deficit.

Cochilco predicted that the copper market would be in a surplus of 275,000 metric tons in 2015 and 404,000 metric tons in 2016, and that the medium- and long-term fundamentals remained solid. Before that, production from a series of new mines would weigh on prices just as demand in China, which consumes around half of the world’s copper, was cooling. Cochilco predicts that copper production will rise by around 6% this year and next to 19.6 million metric tons and 20.9 million metric tons respectively, based on additional production from Chile, Peru, Mexico, Zambia and Indonesia.

As usual, we will keep our eyes and ears open to see if this prediction holds true.

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