By Raul de Frutos
Copper prices are trading near $6,000 per metric ton, up 30% from just four months ago. Things can change quickly and I don’t know where prices will be by the end of the year, but what’s clear to me is that most analysts’ forecasts seem way off. According to a recent survey polled by Reuters, copper analysts are expecting prices to average $5,350/mt this year.
In my opinion, this is a very conservative price average and quite bearish due to what Behavioral finance calls “anchoring,” the human tendency to attach or “anchor” our thoughts to a reference point even when it makes no logical sense. Analysts see that copper prices have risen significantly and quickly, so they anchor the new price of $6,000/mt onto the $4,500/mt level where prices were trading at just a few months ago. This creates the idea that $6,000/mt is an expensive price for copper and, for this reason, you will almost see no one but me calling for an average above $6,000/mt this year.
Most of the time, how high the metal was trading earlier is irrelevant when there has been a change in the metal’s underlying fundamentals. There are many things that affect the price of a metal, but at the end it all comes down to three things: Demand, supply and investors’ sentiment. All these are looking much more bullish for copper compared to last year.
Demand for copper has improved in China. Once again, increased infrastructure and property construction spending last year has boosted the metal there. An increase in infrastructure spending is also expected in the U.S. This boost in demand for metals has translated into price increases for all industrial metals. When investors are bullish on industrial metals that creates a tailwind to any individual metal as investors tend to overreact on bullish news while dismissing bearish news.
In addition, we are witnessing an increase in raw material prices. Oil prices have nearly doubled since this time last year. Higher energy prices increase the cost of producing metals (especially those energy-intensive ones like aluminum) and boost investor appetite for industrial metals.
In addition to this more bullish macro-environment, copper is also developing a bullish narrative of supply short fall. The copper supply has been hit due to issues at BHP Billiton’s (NYSE:BHP) Escondida mine and Freeport-McMoRan’s (NYSE:FCX) Grasberg mine.
A strike at Escondida in Chile, the world’s largest copper mine, appeared far from ending this week as the conflict neared its third week, with the union denying a news report that it had returned to talks with the mining company. The mine produced about 5% of the world’s copper in 2016.
Freeport-McMoRan is barred from exporting copper ore from Grasberg in Indonesia. To make things worse, the company started talking about adjusting its mining rates and seems headed for arbitration with the government.
There will be other temporary suspensions at smaller copper mines such at El Soldado mine in Chile. In addition, some major contract negotiations in large mines are due this year.
What This Means For Metal Buyers
Copper prices might look expensive compared to what they were just three months ago, however that rally might just be the beginning of a bigger move. Sentiment in the industrial metal complex remains quite bullish and current supply issues could turn into large deficits if stoppages and disruptions are prolonged, building the case for new rallies in copper prices. Analysts' price forecasts are looking quite conservative.