Growth Fears Override Supply Squeeze for Beaten-Down Copper
June 17 2019 - 4:05PM
Dow Jones News
By Joe Wallace and Kirk Maltais
A work stoppage at a huge Chilean mine has failed to boost
copper prices, indicating that investors are wary of betting on
growth-sensitive commodities ahead of the G-20 summit in Japan in
late June.
Unionized workers at Chuquicamata, which produced 1.5% of global
copper output last year, went on strike on Friday after contract
negotiations with management fell through. The disruption is likely
to add to existing pressure on copper supply, but some investors
are reluctant to buy the metal as long as trade tensions between
the U.S. and China are clouding the outlook for the world
economy.
Three-month copper futures on the London Metal Exchange, the
global standard, have lost 1% over the past week despite the strike
at Chuquicamata and are close to their lowest level in two years at
$5,820 a ton. The metal is used in everything from electrical
wiring to autos, so investors follow its price as a gauge of
momentum in the world economy.
Copper for June delivery gained 0.6% to $2.6510 a pound on the
Comex division of the New York Mercantile Exchange on Monday and
has edged lower in the past week.
Concerns that demand is flagging, and could take a further hit
from U.S.-China trade tensions, are overriding the upward pressure
on prices from stalling supply. Commerce Secretary Wilbur Ross told
The Wall Street Journal on Sunday that presidents Trump and Xi
Jinping are unlikely to strike a major trade deal if they meet at
the summit in Osaka.
"Fundamentally copper's looking good," said Vivienne Lloyd, a
metals strategist at Macquarie, referring to tight supply. "But
it's not going to be able to escape the overwhelmingly bearish
influence of the trade conflict."
Metal brokers say that trading is unusually thin, another sign
that investors are avoiding making bets in either direction ahead
of the G-20. So far in June an average of 40,887 three-month copper
contracts have changed hands on each trading day on the LME,
according to Refinitiv data, down from 58,547 in the same period
last year.
Slowing economic growth in China is particularly worrying for
investors given the country's voracious appetite for raw materials.
Data showing that industrial production grew at its slowest pace in
17 years in May weighed on metals futures on Friday. Earlier this
month, a survey of purchasing managers suggested that China's
manufacturing sector was close to contracting.
Even before the Chuquicamata strike, Morgan Stanley estimated
that global output of mined copper was running 3% lower than it was
at this stage in 2018. The mine is run by state-owned Codelco,
which declined to comment on the industrial action Monday.
There are several other squeezes on supply. In Zambia, the
seventh-largest copper producer in the world, the government has
moved to wind up Konkola Copper Mines, a subsidiary of
London-listed Vedanta Resources Ltd. Vedanta declined to comment
Monday, and is challenging the liquidation in court.
Glencore PLC said Monday that it will be shutting down
production at its Mopani copper smelter in Zambia due to "a
significant failure" in one of the facility's furnaces
necessitating a "major refurbishment program" lasting until the end
of this year.
There are also longer-term pressures on copper output. Apart
from the restart of Glencore's Katanga mine in the Democratic
Republic of Congo, no major new copper mining capacity was brought
online in 2018, according to the International Copper Study Group.
The intergovernmental organization expects global output of mined
copper not to change this year after expanding 2.5% in 2018.
This supply backdrop should ultimately lead to higher prices,
said Hakan Kaya, senior portfolio manager at Neuberger Berman.
"Disruption from Chile or Zambia are wake-up calls for investors to
realize how fragile the supply chains in this domain and how upside
volatility may exist in the most unexpected times."
But for now, he added, "buyers cannot see forward and cannot
commit, and no surprise they are more and more absent from
markets."
--Ira Iosebashvili contributed to this article.
Write to Kirk Maltais at Kirk.Maltais@wsj.com
(END) Dow Jones Newswires
June 17, 2019 15:50 ET (19:50 GMT)
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