Copper Weekly: What's In Store For 2017?

| About: United States (CPER)

Summary

2017 saw a slow start for copper, but the focus is shifting towards growing demand and possible supply disruptions.

Workers at Escondida, the world's biggest copper mine, have seen their first proposal flat out rejected and have put a possible strike on the table.

Rising prices will empower labor unions that have suffered on the back of low prices, years of hard bargaining could come back to bite producers as copper trends upwards.

Copper held its ground over the last few weeks after bouncing off a sub $2.50/lb bottom (JJC,CUPM,CPER). Prices are now back on the uptrend, indicative of a rangebound start to the year for the metal. Over the next few months, the focus will move towards labor agreements and projects that the majors may (or may not) give the go-ahead to.

In The News

Often, more can be understood about the market by studying what investors and the media are focusing on, rather than the technical aspects of the market. Over the last week, headlines have discussed technical trading, a strong dollar, but the majority focused on possible sources of disruption and supply. This is representative of the market's search for reason in the recent moves and underscores a change of sentiment towards a more bullish thesis. Funds continue to be long copper.

The graphic below is the output from a program that works to distill dozens of articles into the most important changes in the week to week focus of news articles. Over the last seven days, we have seen a continued focus on demand growth, with the program finding a majority of articles referencing the key component of the rising copper price. Another important takeaway, and possibly one less obvious to investors is the growing discussion around the Oyu Tolgoi mine as the mine has resumed shipments of copper, a thorn in the side of the bull story.

Commitment Of Traders Money Managers

Copper longs, and thus net positions, have trended slowly downwards over the last few weeks - a sign of both profit taking, and likely some nervous bulls. However, net positions remain near record highs, and when we get an update for this week (on Tuesday) I expect a positive jump in net positions as the majority of news has been positive.

LME Inventories

LME inventories have fallen away from the sharp spike seen before Christmas. Surprisingly cancellations have fallen in lockstep with inventories, a possible sign of a closer balance between supply and demand.

Takeaway

Over the last few weeks and despite a sharp drop in the copper price, the smart money is still massively net long on copper. Fundamentals continue to support a rising price. And, interestingly, the rising U.S. dollar did almost nothing to reverse the trend in copper; a positive for miners as many incur costs in foreign currencies, reducing all in sustaining costs against the copper price.

Most importantly, workers at Escondida and BHP began discussions on a new collective bargaining agreement. BHP rejected an initial request for a 7% pay-rise and substantial bonus package. It will not be a surprise to see that unions will fight harder than ever for a payrise after suffering in the recent drawn-out bear market. We could see major supply disruptions due to widespread strikes across the world. Funnily enough, if rising prices empower unions to strike, the result would be higher prices, strengthening their argument.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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