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Copper - Time To Position. Dr Stephen Bartrop


As part of the paid subscription to Breakaway Mining Research Daily and Weekly Reports, Dr Stephen Bartrop - Director Breakaway Research, has written a report on the copper sector, including disruptions and forecasts of the sector. As part of subscribing to this report, Dr Bartrop will give general advice recommendations.  To obtain a free one month trial to the Breakaway Mining Research Daily and Weekly Reports, click here. An extract of this report (without recommendations) is featured below:

Over the last few months we have constantly hear of disruptions in copper production by large producers for a variety reasons. The most noticeable have been:

  • Striking labour unions at Escondida in Chile
  • Freeport’s Grasberg production being stalled in response to the Indonesian Government permitting pressure
  • Strike action at Cerro Verde in Peru

Total lost production is expected to be around 260kt or around 6.5% of total production. This sounds significant but how important is it on in world production? We believe it is significant in drawing down stocks more rapidly than market expectations but more importantly, world demand is being underestimated and potentially provides a bullish copper price outlook that is not factored into the market.

Copper Supply/Demand forecasts

Breakaway Research has reviewed current copper supply/demand forecasts across a number of leading brokers and institutions and believes that there is a potential underestimation of future demand and an overestimation of future short term supply

A future supply deficit situation has been accelerated by the recent unforeseen mine disruptions discussed earlier and interestingly, the broader market has been slower to recognise the price upside

The risk to our forecasts is related to an unexpected slow-down in world growth. We think this is unlikely (and more likely to surprise on the upside) as the US President will drive his infrastructure plans and leading to job creation to make America ‘great again’ while China can’t let itself fall behind with faltering growth in this contest.Elsewhere the EU will have to prove that the Brexit is not really going to be a headache. So while this considerable political motivation in the world under the new order (countries moving on from globalisation to self-benefit), there is underlying economic strength across all zones with the most prevalent in the US which is stimulating the Federal Reserve interest rate increases.

In forecasting copper prices, Breakaway Research believes the most useful tool is charting historical copper prices versus the quantity of copper stocks expressed in weeks of consumption. This is presented below in Figure 1. What is important is that as stocks expressed in terms of weeks of consumption move towards a 4 to 6 week range, the copper price responds accordingly.Figure 1 is separated into different time periods so the more relevant periods are post 2005 as we believe that the copper price (and other commodities) moved to a structurally higher level as real production costs were able to catch up during the 2003 to 2008 resources boom.

Figure 1. Historical copper price and copper inventories expressed in weeks of consumption.

Source: Brook Hunt, RBC


In reviewing copper cost curves, copper has always provided a better margin than other base metals. As evident in Figure 2, more than 90% of copper producers will be generating a margin at the current spot price of US$2.67/lb. Hence, the main influence on the copper price going forward is unforeseen demand and its affects in drawing down stock levels more rapidly than the market anticipates.

Figure 2:

Source: Brook Hunt, RBC

Breakaway Research has compiled data from a number of leading brokers and the International Copper Study Group to compare supply and demand forecasts. We have also included our forecasts which are more bullish and reflect the combination of recent production losses affecting stock drawdowns and world growth which is not faltering to the extent envisaged by other analysts.

Our analysis suggests the copper price could be substantially higher in 2018 with a forecast average US$3.18 – 20% higher than the average of other forecasts. Indeed, we expect the copper price to be around US$3.00/lb in late 3Q and 4Q CY2017 to provide an average forecast of US$2.80/lb in 2017.

Figure 3. Copper Supply/Demand and price forecasts.

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