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Copper – Wrapping Up Q3, Looking Ahead to Q4

By Jim Williams

As the calendar turned from September to October, copper continued its up and down story of 2016. So far this week, copper has lost nearly 2 percent to hover near a one-week low. The latest downturn can partly be contributed to a stronger U.S. dollar thanks to a slump in gold prices, ironically enough, during China’s National Day Golden Week celebration.

Another key factor for a stronger dollar is comments by Richmond Federal Reserve President Jeffrey Lacker yesterday that there is a strong case for raising interest rates.

“We do not expect to see much change in the metal markets given that China is out this week, but have to suspect that the recent collapse in gold and a reviving dollar could start impacting prices at some point,” Ed Meir of INTL FC Stone said in a report. “An inflection point could come on Friday when the U.S. non-farm payroll comes out. A stronger-than-expected number should boost the dollar further and increase the pressure on commodities.”

An onslaught of data from China in coming weeks is expected to point to modest improvement in the economy in the third quarter as a government infrastructure spree and a housing boom boosts demand from steel and glass to furniture and appliances.

Q3 Update – Copper Lagging
There is no getting around the fact that copper is the worst performing LME metal so far this year. The red metal posted a 0.23 percent gain on the LME and a 0.68 percent gain on COMEX during Q3. COMEX copper closed Q3 at $2.2105 per pound. LME copper closed the third quarter at $4,846 per ton. Over the first nine months of 2016, copper appreciated by only 4 percent and 3.11 percent respectively on the two markets. Every other base metal, including aluminum, is up more than 10% over the same period.

Copper fell to the lowest level since 2009 in mid-January when active month COMEX futures traded $1.9355 per pound. The red metal then proceeded to rebound to $2.3235 during Q1.

Copper could not build on those gains and has made lower highs and lower lows since the March highs. Most recently, copper has moved from $2.0640 on September 12 to just over the $2.20 level.

“Copper’s results for the third quarter were disappointing considering the moves in other base metal prices which is a continuation of the overall trend in 2016 for the red metal,” says Andrew Hecht, of Seeking Alpha. “The primary reason for the lackluster return in the red metal is two-fold. An abundance of copper metal in financing arrangements in China. And, the price of copper is above the cost of production. In fact, with lower energy prices since 2014, the cost of producing a pound of copper has declined.”

Looking Ahead to Q4
“Copper needs to continue to hold the $2 level in Q4 to avoid liquidation from stockpiles in China,” Hecht adds. “Resistance is at $2.33 per pound on the December COMEX futures contract is an important line in the sand as any move above that level would negate the current bearish technical price pattern. However, the red metal continues to suffer under the weight of its supply fundamentals.”

Looking Ahead to the Next Four Years
Japan’s biggest copper producer, Pan Pacific Copper Co., predicts that copper will surge 40 percent through 2020 due to a global market shortage. Pan Pacific expects that by 2020 the red metal will average $7,000, from $5,200 in 2017 and $4,800 this year. Global investment banking and diversified financial services group Macquarie has a much more subdued forecast on copper, predicting prices at $4,563 in 2017, $4,413 in 2018 and $5,188 in 2020.

Last week, Citigroup said the copper market will finish 2016 with an 110,000 ton surplus but then deficits will hit and persist through the decade, supporting prices.

As usual, no one has a crystal ball to know what will happen with the price of copper, but when – and if – it changes, we will have the details for you here.


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