Thomson Reuters GFMS released its much anticipated 2015 Copper Survey during April’s CESCO week in Santiago, Chile, and Copper Investing News had the chance to speak with Bruce Alway, base metals mining manager at GFMS, about the results.
The firm is forecasting that copper prices will average $5,795 per tonne for 2015, and at 12 percent lower than last year, that figure certainly won’t have been exciting for copper bulls. Still, Alway said that the message was well-received.
“The Chilean minister of mines was very happy,” said Alway. “She said ‘that’s fantastic, exactly what we’re telling people … the deficit’s coming.’” Not surprisingly, he added that the mood amongst producers at CESCO was a bit more mellow, with companies “still making some cash, [although] not as much as they would like” at the moment.
Unfortunately, the poor copper price environment seems unlikely to let up soon. The survey cited disappointing demand growth along with growing supply for copper’s pains, but Alway stressed that it’s mostly a supply story.
All about supply
Overall, Thomson Reuters sees the copper surplus widening from 316,000 tonnes in 2014 to 399,000 tonnes in 2015, based on just over a 3 percent growth in mine production and a consumption growth rate year-on-year of just under 3 percent. “So just over and just under. That’s a pretty poor growth rate,” said Alway. He added that he wasn’t too worried about demand, and was more concerned about how bad the surplus will be.
“There’s so much in ramp-up, and there’s so much new supply which is coming through the pipeline, It’s really about growth in the near term,” he said . “It’s a supply story really.”
To be sure, there have been several supply disappointments already in 2015 (troubles at Olympic Dam, and floods in Chile, for example), but Alway held firm to the GFMS predictions of a surplus this year, stating that “there’s always a disruption allowance” factored into such forecasts.
“There’s no point trying to forecast weather events and labour strikes and disruption,” he said. “It’s a feature of the market every year … but there’s just too much growth.”
Furthermore, he reminded copper investors that mine production is just one part of the equation – refined production is also a key consideration.
“If you look at what’s happening to treatment charges – what [smelters can] charge producers – they’re going up,” Alway said. “That tells us there’s a surplus of concentrate … so that should give us enough headroom for a little bit of disruption.”
That said, the GFMS report also had some cautious words for long-term bears, pointing out that with fewer projects coming online in the medium term, today’s “feast” could turn into tomorrow’s “famine.”
“Longer term, prospects arguably look disconcerting for supply growth,” the report said, putting the incentive price for new copper production at $7,073 per tonne. Certainly, that scenario is a bit more heartening for the bulls, and we’ll share more of Alway’s thoughts on the incentive price and new mine production in another article.
… and a little about demand
Alway took some time to talk about other factors affecting prices. Of course, demand from China is always important to consider, and Alway agreed that demand from the country will fundamentally continue to rise, even though growth rates appear to be slowing and this year’s GFMS report stated that prospects for copper demand from China aren’t looking great for 2015.
“The Tier 1 cities are still growing … Houses are still required because you’ve still got urbanization,” he said. Alway also cited the need for power transmission from solar and wind farms in central and western China to cities in the east, as well as the building of high-speed train infrastructure, as future drivers for copper demand.
“There’s definitely a good argument for medium term growth and for it to remain positive,” he said. “It will slow, but [copper is] an infrastructure metal and its a metal which is obviously linked to global growth.”
Alway added that countries outside of China need to “do more” in terms of maintaining growth, since any slowdown from China still makes for “a big headwind.” Thomson Reuters GFMS anticipates slower copper demand growth from China in 2015.
Speaking of the rest of the world, another factor weighing on copper lately is, of course, the strong US dollar. Since copper is often priced in US dollars, a stronger currency makes copper more expensive, which can dampen copper demand. However, a strong US dollar also indicates a strong US economy, which is arguably good for copper consumption.
Explaining those competing factors, Alway stated that “a strong dollar is always a bit of a headwind in terms of consumption,” but that there would also be a bit of an offset from a stronger US economy.
Thomson Reuters stated that the US “remains a bright spot” alongside other “gloomy” prospects for demand.
To be sure, some analyst firms have suggested that a deficit could come earlier. Alway stated that, as with predictions of oversupply in the iron ore market prior to the current glut, everyone can see what’s coming in the copper space to some extent. However, he added that he hasn’t yet seen any indication that the market has seen the worst of oversupply.
“It’s a pretty bearish view out there and a lot of the long-only guys have left the market … there’s a lot of shorting. It’s a dangerous place,” he said in reference to hedge funds and other similar types of investors. Of course, that goes beyond copper, as Alway noted that many other commodities are “well below recent highs” as well.
“You can take a fundamental view, you can believe commentators that say there’ll be a deficit sooner, but we’re not seeing that in prices yet,” Alway said.
Still, given the GFMS call on the incentive price for new supply, Alway said that the firm sees prices moving higher in the next two years. While this year’s average copper price is set at $5,795 per tonne, Alway sees that number moving to $6,600 per tonne for 2016 and $7,500 for 2017.
And where will prices end 2015? Alway sees no serious price appreciation until Q4. Although he hasn’t done an official quarter by quarter analysis, he expected copper to be above $6,000 by the end of the year, given the firm’s price prediction for 2016.
Overall, however, he stressed his belief that there would be more downside to come first.
“We’ll see what the production numbers are for Q1,” he said. “If we get a good momentum, and reiterations of full year forecasts and growth outlooks, then I’m sure it will be another weight on the price to go below $6,000 and head lower.”
For more information or to download a copy of the survey, visit Thomson Reuters GFMS Annual Surveys.
Securities Disclosure: I, Teresa Matich, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.