Copper prices have not bottomed yet with outright production curtailments, the most effective measure to rebalance oversupplied markets, few and far between.
That’s the bearish view from Michael Widmer, head of commodities research at Bank of America Merrill Lynch, who has slashed his forecast for Doctor Copper on the back of continued market surpluses all the way out to 2018.
“We forecast surpluses all the way to 2018 at present and we reduced the 2016 forecast by 9% to $4,513/t ($2.05/lb),” said Widmer in a research note released overnight.
“This dynamic is one of the reasons sentiment towards copper has shifted completely: a couple of years ago, most market participants believed copper would flip back into deficit soon; meanwhile, on our recent trip to the US and Canada, virtually every investor we met has been bearish.”
While he predicts Chinese demand will stabilise after a “terrible 12 months”, he does not believe it will be enough to turn the beleaguered metal’s fortune around.
“Underlying consumption growth still remains muted,” he said.
“Putting it all together, we see scope for a continued stabilisation in China, but we do not believe this will be sufficient to take copper out of the bear market.”
Widmer suggests that global production cuts of 500 kilo tonnes are currently required to re-balance the market, something that would place upside pressure on prices should it eventuate.
“While various mines and companies are candidates for closures, further production discipline will only emerge in reaction to additional price declines,” he said.
“Having said that, if and when more supply discipline emerges, we would become more constructive.”