11 Jan 2017 20:54 IST

Will copper lose its lustre?

The sharp rise in copper prices, boosted by the US’ and China’s infrastructure development plans, may not sustain

Demand slowdown and the market shifting from a deficit to surplus may keep prices under check

The copper spot price on the London Metal Exchange (LME) has been in a prolonged sideways range of $4,500-5,000 a tonne since early 2016. But the outcome of the US presidential elections triggered a strong break-out from this range, with prices surging to a high of $5,935 in the first week of December. This is a whopping 19 per cent rally in just one month. The rally is, however, not likely to sustain as demand from the US is relatively insignificant, compared with demand from other Asian economies.

Trump’s plan

So why did copper celebrate Trump’s victory when the entire world was in shock at Hilary Clinton losing the election? This is thanks to Trump’s plan for massive spending on the US infrastructure sector to accelerate economic growth and increase employment. “We are going to fix our inner cities and rebuild our highways, bridges, tunnels, airports, schools and hospitals. We’re going to rebuild our infrastructure, which will become, by the way, second to none. And we will put millions of our people to work as we rebuild it.” This is what Trump said in his victory speech.

He plans to spend $1 trillion on US infrastructure over the next 10 years and, in his campaign, promised huge job creation in the construction, steel manufacturing, and other sectors to build transportation, water, telecommunications and energy infrastructure to boost economic development.

The spending plan and Trump’s “America’s Infrastructure First” policy have boosted the prices of copper and other industrial metals such as steel, as the US demand for these metals is expected to surge. According to the International Copper Study Group (ICSG), building construction, infrastructure, transport and industry consume 70 per cent of the total copper use.

Keep an eye on China

Is the current demand from US significant enough, however, to trigger such a sharp rise in the copper price? Data do not suggest so. Globally, copper is consumed most in the Asian countries. ICSG data show that Asia consumes 63 per cent of the total copper. The Americas (both North and South America together) consume just about 13 per cent of the world’s copper. China is the largest consumer of copper and accounts for 45 per cent of the global demand. The US consumes roughly 7 per cent of the total global copper output.

This makes it clear that the impact of the US and Trump’s infrastructure spending plan on copper prices could be short-lived and will not be material compared with demand from other Asian countries, especially China. Also, reports suggest that Trump would need more than $3 trillion for infrastructure development. So, one has to be watch the developments in China more closely than the US, though the latter can create short-term volatility in prices.

Outlook for 2017

ICSG had expected the output of refined copper to rise 2.2 per cent to 23.83 million tonnes in 2016 from the year earlier. For 2017 it had forecast that production would increase by 1.7 per cent to 23.79 million tonnes. It also estimates that demand will grow at a slower pace by one per cent in 2017 to 23.63 million tonnes. Slow demand is expected to push the copper market into a surplus for the first time in more than three years by the end of 2017.

ICSG forecasts a 160,000-tonne surplus in copper for 2017. Demand slowdown and the market shifting from a deficit to surplus after many years may keep the metal’s prices under check and may restrict the price surge in 2017.

On the charts, the copper futures contract traded on the COMEX has a key resistance at $2.7. The prices are expected to see a fresh rally only if it breaches this hurdle. Such a break can take it higher to $2.3. However, as long as it remains below $2.7, a range-bound move between $2.3 and $2.7 is possible. A breakout on either side of this range will determine the next leg of the move.