An employee holds copper granules at the Loacker Swiss Recycling AG, Birmensdorf, Switzerland, company on Oct. 25, 2017.Moritz Hager/Reuters
Copper prices extended a recent slide as flaring geopolitical concerns and fears over a slowing Chinese economy weigh on demand for the widely used industrial metal.
Copper futures declined about 1 per cent on Tuesday to US$2.73 a pound and some of Canada’s biggest base-metals companies came under heavy selling pressure, with First Quantum Minerals Ltd., Hudbay Minerals Inc. and Lundin Mining Corp. falling 2.8 per cent, 2.9 per cent and 3.7 per cent respectively.
Copper prices have been falling amid rising concerns that the trade dispute between the United States and China could slow the Chinese economy, a crucial market for the metal.
“There is certainly a heightened level of fear,” Christopher LaFemina, analyst with Jefferies LLC in New York, said in an interview.
Copper had a strong start to the year, hitting a 3½-year high of roughly US$3.30 a pound in January, driven in part by tightness on the supply side. Since April, global inventories of copper have been falling steadily, with demand outstripping supply. But investors nonetheless turned decidedly negative on the metal, with copper futures down some 16 per cent since June.
“We’ve really seen copper prices disconnect from the underlying fundamental situation for the metal,” Ryan McKay, commodity strategist with TD Securities Inc., said in an interview.
"It’s been because of this trade war and fears over global demand getting hit.”
In June, a trade war broke out between the United States and China, with U.S. President Donald Trump threatening punitive tariffs in a move motivated ostensibly by the desire to protect American jobs. In September, he followed through on those threats, imposing a 10-per-cent tariff on Chinese imports. By far the biggest consumer of copper worldwide, China accounts for about 50 per cent of demand. Continuing uncertainty over the trade war, and the possibility that Mr. Trump may impose even steeper 25-per-cent tariffs on China as early as January, has put investors on edge.
"Given that the 25 per cent [tariff] still lingers on the horizon, I don’t think we have much more upside in the near-term,” Mr. McKay said.
“Ultimately, for prices to get higher, we need to see some sort of deal, and I don’t really envision that happening at least until deeper in 2019."
According to Mr. LaFemina, copper stocks are getting hit significantly harder than the physical commodity because investors seem to be pricing in a much gloomier macroeconomic environment for next year, anticipating both weaker global growth and a possible hard landing in China.
“The equities are discounting something more ominous,“ he said.
Despite the pessimism from equity investors, Mr. LaFemina predicts that copper stocks should start to recover in the next few months, as macroeconomic fears ultimately don’t pan out. He also anticipates that copper fundamentals will remain strong and that supply shortfalls will eventually hit home. Next year, production at Freeport-McMoRan Inc.’s massive Grasberg mine in Indonesia is expected to fall significantly, and production declines are also expected at BHP’s Escondida mine in Chile, which is the biggest copper mine in the world.
“This weakness is a good opportunity to buy copper-levered miners,” Mr. LaFemina said.
Niall McGee