Citi Annual Commodities Market Outlook 2018: Copper - moderately bullish outlook with risks evenly balanced

December 04, 2017 / news.metal.com / Article Link

SHANGHAI, Dec.4 (SMM)We forecast a small deficit copper market during 2018 and 2019, and we expect prices to trade above $7,000/t for most of 2018, underpinned by a solid macroeconomic environment and anticipated higher than average mine supply disruptions. The main downside risk is that Chinese demand softens more than anticipated.

Copper - shifts in demand expectations have been critical to the rally

Copper's move higher both over the past 3 months and over the past 2 years has occurred despite a lack of fundamental tightness. The move was in our view driven by an increase in Chinese and global growth expectations. The market is now pricing that it needs an additional 3mt copper supply vs 2 years ago.

Copper - framing the $8,000/t copper bull case for 2018

Most bullish commentators pick the 'round' $8,000/t as a target. Here we quantify two scenarios which could see $8,000/t, the first being an increase in long term demand expectations and the second being a tighter balance and thus tighter copper spreads. A combination of the two scenarios would also suffice.

Copper - Chinese copper end-use demand to grow ~2% in 2018

Chinese copper consumption was higher than expected during 2017, as a strong property and export market underpinned growth in air conditioner and power cable demand. We see Chinese copper consumption growth slowing to by 2.3% y/y in 2018, from ~3.3% y/y growth in 2017.

Our base case is that mine supply growth increases only c.250kt during 2018, after taking a 6% disruption allowance for 2018 (this is towards the top end of historical ranges). Supply growth is heavily reliant on Escondida and Glencores Africa operations.

Copper - potential scrap supply disruptions are a significant upside risk

Up to 200-500ktpa (copper content) of copper scrap may be temporarily 'lost' from the market should China enforce it's 'Category 7' scrap ban earlier than the official plan of Jan 2019. If brought forward, there may not be enough time to shift / rebuild processing capacity outside of China. This represents a material upside price risk.

Copper - annual Treatment & Refining Charge (TC/RCs) outlook

We forecast a 2018 benchmark settlement of TC/RCs of at $88/t and 8.8c/lb, a ~5% decline vs. 2017 benchmark of $92.5/9.2c.


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