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Copper: Hedge against rising prices - Commerzbank

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Feb 25, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    Daniel Briesemann, Research Analyst at Commerzbank, suggests that setbacks are possible in the near-term in copper prices but the fundamentals argue for much higher prices over the course of the year.

    Key Quotes

    “We therefore advise clients to hedge against rising prices. Back in the autumn, the International Copper Study Group had forecast a supply deficit of 127,000 tonnes for the global copper market in 2016. However, excessive production cuts by some global miners and by Chinese smelters had not yet been announced at the time.

    Essentially, Glencore (one of the world’s largest commodity traders and producers), Freeport-McMoRan (the largest listed copper producer) and Codelco (the world’s largest copper miner) announced production cuts totalling around 570,000 tonnes for this year. This corresponds to 2.5% of global supply. Moreover, ten copper smelters in China intend to curtail their production by an overall 350,000 tonnes, equivalent to 1.5% of global and 4.4% of Chinese copper production.

    In addition, they have agreed to halt the construction of new production capacity. In view of these supply cuts, totalling at least 4%, the supply deficit should turn out much higher than expected a few months ago. Unexpected production outages will thus be virtually impossible to offset, especially since copper inventories in LME warehouses have fallen to an annual low.

    The tight market situation is also supported by the demand side. According to industry sources, China’s State Reserve Bureau bought 150,000 tonnes of copper from local producers in January. Furthermore, and despite all prophecies of doom, there is no sign of weaker Chinese demand so far.

    As illustrated by data from the customs authorities, China imported around 530,000 tonnes of copper in December. This was the second highest ever monthly reading. As a result of the significant rise in imports, above all in the fourth quarter, the temporary backlog in the previous year has been offset almost completely. At 4.81 million tonnes, the previous year’s record level was almost repeated in 2015. And this robust demand from China is unlikely to change much this year.

    Hence, there is much to argue in favour of higher copper prices. As of year-end, we look for copper to trade at USD 5,200 per tonne. In euro terms, the price increase should be even more pronounced as a result of the expected appreciation of the US dollar. We therefore advise raw material purchasers to use the sample Forward Extra presented here to hedge against rising copper prices.”
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