Can We Blame Last Year’s Euphoria for Copper’s Recent Woes?
Copper prices have lost 7.7% this year as of February 9. While the weakness in copper prices could be attributed to the selling in equity markets, copper was having a somber 2018 even before we saw the recent correction in equity markets. Comex copper has closed below its December 31, 2017, closing prices in each trading day this year.
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Copper gained ~30% last year, which included an 11.6% spike in December itself. In December, markets started factoring in a lot of positives for copper in 2018. Among the most notable bullish arguments were higher global growth boosting copper demand, supply disruptions amid a wave of labor negotiations in 2018, and a weaker US dollar boosting commodity prices (GLEN-L).
To be sure, all these bullish arguments were valid. Manufacturing activity, as reflected by the PMI (purchasing managers’ index), has been strong globally. Although China’s construction sector has shown signs of moderation, economic activity has been strong.
On the supply side, we saw several labor-related disruptions last year including at mines owned by Teck Resources (TECK), Southern Copper (SCCO), and BHP Billiton (BHP). Richard Adkerson, Freeport’s CEO, said during the company’s 4Q17 earnings call, “This year there are a lot of labor contracts in Chile and Peru coming up and you can expect those negotiations to be challenging and it could be supported from a supply standpoint. So, Codelco has a real challenge in maintaining production. All these things are challenges for the industry but they’re supportive of supply.”
Meanwhile, copper’s 2018 outlook looked strong, and markets factored in a lot of positives in December itself. While the recent sell-off in equity markets is also to blame for copper’s recent woes, the trouble could also be partially due to excessive optimism last year.
In the next article, we’ll see how analysts are rating Freeport-McMoRan (FCX).