It’s not just Capital Economics who thinks the rally in base metals, including copper, may have strayed just a bit too far away from fundamentals in recent days.
Vivek Dhar, mining and energy analyst at the Commonwealth Bank, is another who thinks the rally is looking a little overdone.
“Like other base metals, copper prices have rallied on the back of a weaker US dollar and stronger demand hopes in China,” he said in a note released on Tuesday, adding that “supply disruptions continue to remain a key price support too”.
On the latter, here’s his assessment on what’s helped to underpin the rally in copper, seeing futures hit the highest level since November 2014 overnight:
The latest round of supply disruptions comes from Zambia as copper producers dispute a new electricity tariff of US9c/kWh. Previously, miners individually negotiated rates that averaged US6c/kWh. Some producers have agreed to the higher tariffs, such as First Quantum’s Kansanshi complex and Sentinel mine, which together account for 1.5-2% of global supply. Other producers like Glencore’s Mopani unit, which only accounts for a minor 0.1% of global supply this year, has refused to pay the tariff resulting in a suspension in production. All up, Zambia accounts for 4-5% of global copper supply. That adds to a number of Chilean mines that could see strikes this year as labour negotiations takes place.
However, in Dhar’s opinion, he thinks that investors have overreacted to the supply disruption risks, pointing to the chart below that shows how current disruptions rank in terms of global supply compared to previous years.
“We are actually well below the historical average of disruptions this year,” he says.
“While copper markets have tightened this year, the current price looks unsustainable for a prolonged period. We see downside risks to spot prices over the next six months.”