Barclays still bullish on copper

Copper prices could move lower before they go higher, but Barclays Capital says it believes we have not yet seen the highs for this year.

“It is ironic that the market’s attention has shifted away from physical indicators just when they are looking the strongest they have been in some time,” Barclay’s metal analysts write in a May 16 research report, noting that copper demand is only marginally below its historic peak. 

“The shadow of destocking has masked underlying demand strength convincing the wider world that copper demand, particularly in China, is weak,” they continue. “We believe this is a mistake.”

In their view, “the tightening in some time spreads and firming in physical premiums” that have gone hand-in-hand with the recent decline in base metals prices “reflect the continued improvement in the fundamental picture.”

In China, the copper supply chain inventory is “fully destocked,” the report asserts, and “participants are now drawing on SHFE and bonded stocks.”

Even scrap is tighter. “Scrap usage is being maximized,” the authors claim, and will not offer “a reprieve from a supply-constrained market.” They also note that metal thefts are rising, illustrating that scrap metal is in high demand. According to Reuters, British Railways reported earlier this month that cable thefts have jumped 67% so far this year.

In addition, some copper miners experienced sharp year-on-year declines in output in the first quarter. Copper production at Anglo American (AAUKY-Q, AAL-L), for instance, dropped 14% year-on-year in the first quarter due to heavy rains and lower grades at Colahuasi, while output at Los Bronces “suffered from lower ore grade.”

Lower ore head grades and reduced throughput also drove down copper output at Newmont Mining‘s (NMC-T, NEM-N) Batu Hijau in Indonesia by 39%. Total production fell from 66,000 tonnes to 43,000 tonnes. And production at the deep ore zone of Freeport-McMoRan Copper & Gold‘s (FCX-N) Grasberg mine in Indonesia was suspended temporarily after the death of two workers in a flooding accident.

For the full year, Barclays expects copper prices to average US$10,412 per tonne.