London Metal Exchange (LME) prices have climbed back above $7,250 (a four-year high) on fresh worries about possible supply disruptions. While these concerns are not unfounded, they are tied to the ongoing contract negotiations at Escondida and should be viewed as temporary. Even a worst-case strike scenario has production restored at some point in the third quarter. The closure of Vedanta’s Tuticorin smelter is also raising supply concerns even though the final disposition of the facility is far from certain.
Beyond these two events, fundamentals paint a more reassuring picture of the market for buyers. Visible inventory, including Shanghai bonded warehouse stocks, is higher than in December, Chinese imports are showing no growth, premiums are not moving higher in a worrisome way, and scrap discounts remain relatively wide, a sign of good supply for the secondary market. The US dollar has also appreciated since April, another headwind for a sustained rally in copper prices.
Looking forward, we see a balanced market for 2018, which suggests current prices above $7,200 cannot hold. Specifically, we would avoid purchases above $7,000 per metric ton and await a realignment of prices and fundamentals in the third quarter.
We have changed our view of 2019, however. We now see a modest deficit reemerging that points to support for higher prices. We have raised our forecast for next year accordingly and now have prices nearing $7,000 per metric ton by year’s end. This argues for locking in purchases later this year on any correction below $7,000 per metric ton.