Will Copper Prices Rally Again in Q4?

Copper prices surged more than 9 percent in the third quarter of the year, supported by a weaker US dollar, a strong outlook for Chinese demand and speculation from investors.
The red metal climbed to almost $7,000 per tonne at the beginning of September in a rally seen by many analysts as “overhyped.” And indeed, as the quarter came to a close, prices fell under pressure as the dollar rebounded and warehouse stocks increased.
With the last quarter of the year beginning, the Investing News Network reached out to Dan Smith, head of commodities research at Oxford Economics, to gain more insight about what factors will drive copper and where are prices going in the period. Read on to hear what he said.

Copper supply and demand

Demand from China, the world’s top consumer, is one of the major factors that drives the copper market. Some signals about stronger demand pushed prices higher in Q3, but it seems that will not continue in the last quarter.
“Chinese copper demand will be quite weak in the months ahead. There are many indicators that show that demand in the country is not doing as well,” Smith said. 
Even so, he is positive about medium-term copper demand from the Asian country, as the Chinese economy transitions away from heavy duty industry to consumer-led growth. “We are more optimistic on commodities on a five-year perspective,” Smith explained.   
Looking at demand from countries outside of China, Smith said some markets are becoming saturated. “What we have seen in most markets [outside of China] is a bounce back from the economic recession in 2008 to 2009, which led to abnormally strong demand. We are now coming back to the previous ceiling in terms of typical production,” he said.
Another current topic in the copper market is the demand outlook for electric cars, as many market participants expect the need for copper to increase as these vehicles become more popular. It is estimated that while cars with internal combustion engines require up to 23 kilograms of copper each, a hybrid vehicle uses 40 kilograms — nearly double that amount.
But Smith believes that there will not be any significant takeoff in the next five to 10 years in terms of electric vehicles. One of the major challenges will be infrastructure, and in particular building the fast-charging networks needed for electric vehicles.
“Another reason is that commodities markets will act as a brake on growth. There are potentially bottlenecks in lithium and cobalt,” which are crucial for lithium-ion batteries used to power electric cars.
In terms of supply, major disruptions that took place in the first half of the year supported prices. But worries have eased as top copper producer Chile reported higher output in July. Meanwhile, Freeport-McMoRan (NYSE:FCX), which owns Grasberg, the world’s second-largest copper mine, will continue to export copper as it negotiates a new permit with the Indonesian government.
Overall, Smith believes the copper market is broadly balanced this year, in particular when looking for example at warehouse levels. That said, he mentioned that a strong US dollar could put pressure on prices and will be a key factor to watch in the last quarter. In general, a softer greenback is good news for commodities priced in dollars, as they become cheaper for investors using other currencies.
“We think the dollar will continue to weaken, which is a supporting factor for commodities in the medium term,” Smith said.

What’s ahead for prices?

Looking at the last months of the year, Smith said the copper price rally will run out of steam soon due to weak Chinese demand and as macroeconomic indicators slow down heading to year end. “We are looking to general-to-poor performance across commodities, including copper,” he added.
Similarly, Paul Benjamin, research director at Wood Mackenzie, recently said he expects copper prices to come off to some extent from the high levels seen in Q3. Click here to read the full interview.
Market watchers polled recently by FocusEconomics gave mixed copper price predictions for the last months of 2017. Looking ahead to the next few months, they estimate that the average copper price for Q4 2017 will be $5,870. 
The most bullish forecast for the quarter comes from ABN AMRO (AMS:ABN), which is calling for a price of $6,674; meanwhile, Euromonitor International is the most bearish with a forecast of $4,899. On Wednesday (October 4), LME copper was steady at $6,519.
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Securities Disclosure: I, Priscila Barrera, hold no direct investment interest in any company mentioned in this article.