Viewpoint: Cu outlook clouded by trade war

The global market for refined copper is likely to remain in a narrow deficit through 2020, helping to support gradual price gains. Still, an escalation of the US-China trade war and a sooner-than-expected deceleration in global and Chinese economic growth pose major risks.

Global refined copper output is estimated at 24.2mn t in 2018, rising to 25.65mn t in 2019, according to the International Copper Study Group (ICSG). With consumption estimated at 24.25mn t in 2018 and rising to 24.9mn t in 2019, the group estimates deficits of about 90,000t and 65,000t in the next two years, respectively.

But the trade dispute between the US and China, as well as friction with other trading partners, generated market uncertainty in 2018, causing copper and other metal prices to fall along with equities, while boosting the dollar. While the US-China dispute is poised to end 2018 in a truce phase, uncertainty remains and the outlook for the Chinese economy is gloomier, according to Germany's Commerzbank and France's Societe Generale bank.

Even so, "as supply on the global copper market is still likely to fall short of demand next year, we expect to see rising copper prices in 2019," said Commerzbank.

Commerzbank forecasts copper to average $6,600/t ($2.99/lb) next year, peaking at $6,800/t in the second quarter, then falling to average $6,200/t in 2020.

LME cash copper fell to $5,987/t on 19 December and has settled between $5,823-6,383/t since early July. Its settlement peak this year was at $7,262.5/t on 8 June. Copper is down by nearly 17pc since the beginning of the year.

US bank Goldman Sachs forecasts copper at $6,500/t ($2.95/lb) at the end of 2018, with prices holding in a $6,500-7,000/t range in 2019. That is down from an earlier forecast of $8,000/t by the end of 2019, "in light of both macro and micro developments," including trade tensions, dollar strength and lack of strikes.

"While 2019 may face some temporary headwinds, we expected global copper demand growth to accelerate thereafter," Goldman Sachs said.

Goldman Sachs forecast global refined copper output at 23.45mn t this year, rising to 24mn t next year and 24.5mn t in 2020. With consumption at 23.57mn t this year, 24mn t next year and 24.43mn t in 2020, it forecasts a deficit of 126,000t this year, turning to a balanced market in 2019, with a 107,000t surplus in 2020.

Goldman Sachs sees China's copper demand growing, with ex-China growth accelerating and the "EV and electrification trend continuing." Lack of investment currently in large-scale greenfield projects may lead to "potentially severe deficits 5-10 years down the road."

French bank Societe Generale is forecasting LME cash copper to average $6,800/t over the next six months, rising to $7,100/t by the fourth quarter of 2019.

Societe Generale expects the market to remain in deficit "over the coming years, with higher prices needed to incentivize new supply."

Still, the mounting US-China trade tensions are fueling US dollar strength and weakness in the Chinese yuan. Escalation of the trade war is likely to weaken the yuan further, reducing Chinese demand for copper and dragging copper prices lower.

The French bank estimates refined copper output at 23.7mn t this year, rising by 2.1pc to 24.2mn t next year, with refined consumption of 23.75mn t this year and 24.47mn t next year. It estimates a 50,000t deficit this year, widening to a 270,000t shortfall in 2019.

"Protectionism and trade wars are the biggest downside risks," said Societe Generale, and could lead to a $500/t drop in its six-month price outlook.