Overview of Copper
Base metals continue to experience heady gains on the back of bullish sentiment and a favourable fundamental outlook while bulk commodities like iron ore have retreated from earlier highs and have settled into a steady lower range. We expect this trend to continue through 2018–19, though some recent price gains are likely to moderate before moving higher. Copper prices appear overvalued in the near term despite our bullish longer-term view, while zinc, nickel, and iron ore prices are in line with expected 2018 averages. Aluminium's outlook is cloudier given sensitivity to differing levels of environmental policy enforcement in China, but we are maintaining our current outlook until eventual supply chain impacts are better understood.
Copper prices appear overvalued at current levels of around $3.10/lb (forecast to average $2.85/lb in 2018), with few of the tell-tale signs of a truly tight market despite a nearly 30% gain since June. Copper's recent strength has been thanks
largely to supportive sentiment as money managers and hedge funds continue to bet on copper's connection to the accelerating global economy, pushing up prices as these financial players buy into the futures market. While the firmer global economic outlook is certainly good news for copper, we don’t believe that current market conditions justify $3+/lb levels quite yet. In a tight market, these rising prices would be accompanied by increasing backwardation in futures markets, with prices for today being pushed up to a premium over future shipments as consumers scramble for available metal; however, the opposite is occurring in copper contracts, which are in increasing contango (chart 6), a market state typically associated with oversupply. Copper inventory levels on the major metals exchanges are down this year but remain high relative to typical levels witnessed over the past 2–3 years. We see a roughly balanced copper market that could tilt into mild surplus in 2018 as the final mines sanctioned in the higher price environment begin operations and
Chinese demand eases in line with its slowing real estate and infrastructure investment. While we expect to see copper prices fall back to average $2.85/lb in 2018, risks are currently tilted to the upside. Chile and Peru will see large portions of
their production at risk of potential stoppage as labour agreements come up for renegotiation next year. There is also the potential for a negative surprise in the ongoing Grasberg negotiations in Indonesia, which could further tighten the current or longer-term supply outlook.
Source: Scotiabank Commodity Price Index, Dec. 1, 2017