Copper: Significant Supply Disruptions Fuel Upside
After retracing lower last week, the red metals saw a resumption of buying this week as demand surged on reports that BHP Billiton would be ceasing production at the Escondida mine in Chile, the world’s largest copper mine.
Copper markets are experiencing an interesting dynamic at the moment because although the market is still in a surplus, investors are aware that new project development is very slow in copper markets. This means that although prices have been rising strongly, enough to motivate the initiation of new developments, it will still take a long time for that supply to come on line.
Alongside this, concerns about current supply levels are now rising on the back of the Escondida strike. The mine supplies around 5% of copper globally and the strike is likely to keep prices supported consequently. Alongside the strike in Chile, Freeport-McMoRan has warned that they are going to reduce output at the Grasberg mine in Indonesia which is the second largest copper mine in the world. The reduction in output comes as Freeport is dealing with a smelter strike and currently struggling with renewing its mining permit.
The closure and reduction of output at these two sites should cut around 8% of global copper supply, and already markets are responding aggressively. The strike in Escondida has the potential to cause a significant shift in copper prices depending on how long the strike lasts.
Macquarie expects the strike to last between seven and fourteen days, slashing global copper supply by around 45000 metric tons. Macquarie recently lifted their copper forecast by 9.3%, and although they still foresee oversupply in the market weighing on prices this year and next, they expect a strong rebound following that period.
Copper prices remain in tight consolidation just under the 2016 highs. Prices have been stuck here now for the majority of 2017 so far. Above market, the key level to watch will be a test of the bearish long term trend line from 2011 highs which coincides with structural support at the 2015 high and mid-2014 low.
Iron Ore: China Demand Boosting Prices
Chinese buyers returned in force following the week-long New Year holidays which finished last Friday, seeing a resumption of construction activity. Iron had been under pressure initially on the week following a rate hike by the PBoC last Friday which increases financing costs for commodity holders. However, prices were able to rebound and trade higher on the week.
Iron bulls are now hoping that China data due over the coming weeks will signal a strong start to the year for the world’s second largest economy, further boosting the price. The first key print will be trade data due on Friday.
Prices continue their steady trajectory higher and are now currently challenging key resistance around the $84 level. A break here will signal a fresh expansion within the bullish trend.
Zinc: Supply Disruptions Adding Support
Tracking the broad move sin commodities this week, which have been boosted through supply disruptions, the return of Chinese demand, and a subdued Dollar, Zinc prices have continued to rise. Supply disruptions have also hit the Zinc market with Korea Zinc announcing that they will be reducing output from its smelting operations by nearly 8% this year (50,000 tonnes). The company now plans to sell 599,937 tonnes of Zinc over 2017, down from 650,000 tonnes initially.
Also this week Robert Friedland of Ivanhoe Mines spoke of huge zinc demand to come this year, during a conference in South Africa noting the increasing practice of adding zinc to soils to grow food.
Zinc prices are turning higher once more and pushing back up towards the 2017 highs, which sit not far under the key 2016 highs.
Read what was going on with commodities last week: Weekly Commodities Wrap: Metals Complex Surges On Weak USD