Copper: From Surplus to Shortage

Andamento del mercato - 08/02/2017

Less than four years ago, copper was a cautionary tale of rampant overinvestment and misallocation of commodity producer capital.  With interest rates at near record lows, companies mining the industrial metal went on a buying binge, financing new acquisitions with rock bottom borrowing costs and rapidly scaling up supply.

The massive surge in output that resulted from these efforts sent copper prices plunging from 2011 onwards as the market imbalance prevailed for a significant period before bottoming out in January of 2016 at the lowest point since the last financial crisis.  With prices so low, producers finally took steps to alleviate the glut by mothballing higher cost production and slowing the pace of investment in new capacity and mine development.

Helping prices recover were falling copper stockpiles on the London Metals Exchange alongside promises of greater infrastructure spending and development from US President Donald Trump.

Furthermore, anticipation of additional fiscal stimulus from China was enough to stir some optimism.

Although the infrastructure plans have not yet come to fruition, in a development that may conceivably weigh on prices modestly until more details are unveiled, other fundamental developments are now driving the copper reversal. The explosive momentum witnessed in copper prices over the last session highlights the growing pressure on supply as BHP Billiton plans to shutter the Chilean Escondida mine that accounts for nearly 5.00% of total global output.

With workers threatening a strike following labor negotiations between the government and deteriorating company, this factor could be supportive of additional gains in copper prices over the near-term, especially if the situation remains unresolved.  Adding to the potential supply disruptions is news that producer Freeport-McMoRan was unable to attain a new Indonesian export license.

As a result, copper prices may benefit from these tailwinds over the near-term until these interruptions are resolved.  The last big driver of additional gains could be a forthcoming stimulus announcement, whether infrastructure or fiscal in nature from the United States or China.

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