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I chimed in on the
capriciousness of copper in the late spring (Mercenary Musing, May 28, 2018).
Since then, copper prices
hit a 3.5 year high at $3.29/lb in early June but then lagged over the summer
months. Weakness continues unabated with Friday’s close at $2.86 equating to
a 13% loss from its ephemeral high in June:
The downtick has occurred
despite strong fundamentals:
·World warehouse stocks
are dropping, down 50% since the first of April and at lows not seen since
early December of 2016:
 
·Strong demand from China
includes an all-time record for concentrate imports in September at 1.93
million tonnes and a 15% year-to-date increase in refined copper imports according
to the International Copper Study Group (ICSG).
·The Baltic Dry Index
(BDI), a leading economic indicator, reached 52-week highs at over 1700 for
much of August and remains at robust levels over 1500:
On the other hand,
Chinese imports of copper scrap are down over 40% in gross tonnage from last
year’s record high; this drop is mainly due to new regulations requiring
higher purity scrap. However, the lower tonnage is no doubt mitigated by an
increase in copper content. Also, other markets in Southeast Asia have ramped
up their processing of lower-grade scrap into refined copper that eventually
makes its way into China.
The only macroeconomic
factor that has been negative for the price of copper since it reached its
pinnacle during the first week of June was settlement of numerous Chilean
labor contracts in July and August. Contrary to analyst expectations, there
has been no disruption of copper supply in 2018 due to strikes.
In fact, the ICSG reports
that worldwide copper production was up 5% in the first half of 2018. Despite
that increase, there was a small supply deficit over the first half of 2018
at 50,000 tonnes. Depending on the source, year-end projections now range
from a deficit of 90,000 to 200,000 tonnes.
There is one pending
supply disruption. Temporary suspension of Codelco’s smelter operations at
Chuquicamata and El Salvador will upgrade antiquated facilities to meet new
Chilean environmental standards in mid-December and are expected to last 45
to 80 days.
Chinese copper import
premiums have surged to $120 per tonne in late September, a level not seen
since 2015. This is further evidence of a tightening supply situation.
So why have copper prices
performed so poorly when supply-demand fundamentals have remained strong?
Apparently there is one
reason and one reason only for the decline: Hedge fund speculators on both
sides of the Pacific are massively net-short copper in the near-term and that
has resulted in pronounced backwardation in the futures curve.
After the usual
post-Chinese New Year demand increase from mid-February to early March,
futures contracts were in contango. But since then, they have been in
backwardation from the front month to the third or ninth month out with only
a couple of exceptions. Contango occurred prior to the June high and was
predicated on an August strike at Escondida. Also, the futures market was
briefly in contango in late September.
Here is the strikingly
backward LME forward curve for October 12 carried out to contango in June
2020. That is a whopping 20 months and reflects an extremely bearish view by
speculators and traders for copper demand going forward:
The ongoing talking head
chatter on tariffs and the so-called “trade war” between the US and China
continues to weigh on all base metal markets and especially for copper. In my
opinion, big traders and speculators have glommed onto the scenario of a
major disruption in world trade and are betting on a sharp drop in Chinese
demand for the red metal.
However, they seem to be
discounting the idea that China will embark on another major infrastructure
build-out, not only in-country but also via implementation of its Belt and
Road Initiative. This massive undertaking is intended to link Eurasian and
East African countries to China with a series of road corridors and maritime
routes.
Quite frankly, I do not
buy into these bearish views on copper. Given the current price in the $2.80
- $2.85 range, a significant amount of higher cost, low-margin production is
underwater. I fully expect derivative markets to revert to normality; i.e.,
an outlook mostly driven by projections of short-term supply-demand
fundamentals. At that point, the market will squeeze the massive short
positions held by speculators.
In short, those specs
with short positions are likely to take it in the shorts. This is the usual
scenario when future positions are overwhelmingly on the one side of a trade.
And when that occurs, the
price of a pound of copper should recover to well above $3.00. My target for
2019 is the previous high of $3.30, a base level many analysts agree is
required to stimulate new developments and mine production in the copper
sector.
After all, world
population is growing by 85 million every year, a quarter of the humans
living on Earth still do not have electricity, most of the above people are
born and live in eastern Asia, and that particular region is developing
infrastructure and modernization rapidly.
Electrification requires
massive amounts of copper. Electronics, communications, construction,
industrial machinery and equipment, transportation, and consumer products are
also major consumers.
Here’s a chart showing
the relentless growth in world copper usage from less than 500,000 tonnes in
1900 to nearly 24 million tonnes last year:
Moreover, while the
world’s population has nearly tripled since 1950, the amount of copper
consumed per person has more than doubled:
We now use about eight
times the amount of copper consumed in 1950.
Therefore, I must
conclude that the growth in copper demand will continue at a long-term
annualized rate of 3.4%, just as it has since 1900.
I have presented a
compelling case for continually increasing copper demand. When combined with
a paucity of new supply in the pipeline, dropping mine grades, and lack of
major discoveries in stable geopolitical jurisdictions over the past three
decades, supply-demand fundamentals must inevitably lead to an increase in
the price of copper.
And folks, this bullish
scenario exists for copper throughout the short, medium, and long terms.
Ciao for now,
Mickey Fulp
Mercenary Geologist
Acknowledgment: Troy McIntyre is the research
assistant for MercenaryGeologist.com.
The Mercenary Geologist
Michael S. “Mickey” Fulp is a Certified Professional Geologist with a
B.Sc. Earth Sciences with honor from the University of Tulsa, and M.Sc.
Geology from the University of New Mexico. Mickey has 35 years experience as
an exploration geologist and analyst searching for economic deposits of base
and precious metals, industrial minerals, uranium, coal, oil and gas, and
water in North and South America, Europe, and Asia.
Mickey worked
for junior explorers, major mining companies, private companies, and
investors as a consulting economic geologist for over 20 years, specializing
in geological mapping, property evaluation, and business development.In
addition to Mickey’s professional credentials and experience, he is
high-altitude proficient, and is bilingual in English and Spanish. From 2003
to 2006, he made four outcrop ore discoveries in Peru, Nevada, Chile, and
British Columbia.
Mickey is
well-known and highly respected throughout the mining and exploration
community due to his ongoing work as an analyst, writer, and speaker.
Contact: Contact@MercenaryGeologist.com
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