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Amid the current global uncertainty, how bearish should we be on copper?

Published: 10:36 16 Jan 2019 GMT

1547635654_Kounrad-copper-cathode
Copper cathode from Central Asia's Kounrad project in Kazakhstan

What should we make of the current price of the bellwether metal, copper?

It’s been on a significant downtrend lately, as a succession of poor economic numbers out of China have spooked markets and led to speculation that demand could slow.

In part, this is because of the economic warfare between China and the USA. As a headline grabber, Apple Inc’s (NASDAQ:AAPL) recent warning on Chinese revenues was second to none, but underlying the woes of the world’s ex-biggest tech company are the deeper woes of China.

Exports are slowing, consumer demand is slowing, there are fears about bursting credit bubbles, and on top of all that, in spite of all the progress in recent years, it’s still an opaque country that’s hard for market participants really to read.

Will President Xi crack under this tariffs pressure and sign up to a trade deal that’s advantageous to the US and which will allow Mr Trump to claim victory? Or will he double down, reckoning that the country that’s endured the Great Leap Forward and the Cultural Revolution is more than capable of weathering the effects of a mere tariff war?

At this stage, the uncertainty is almost more problematic than the eventual outcome, as markets don’t know which way to look.

There seems a very real possibility that as a result of the tariff war, and ongoing economic weakness in Germany and Japan, that global growth will slow markedly this year. It’s been enough to make the Federal Reserve put the brakes on its monetary tightening, even thought the US itself is still booming, and its been enough to spook stock markets world wide.

Commodities too, with the honourable exception of gold, have taken a hit.

The copper price has fallen by more than US$1,000 per tonne since the optimism peaked in the spring of 2018, and current sentiment would have it fall further. On the other hand, looking back slightly further, the price is still above the 2016 troughs. So, mixed signals then.

Broker Liberum talks of “difficult dynamics” for the next six months, while conceding that copper remains the favoured commodity for most major miners. That being so, and with the balance sheets of the majors all in good shape at the moment, there may be an opportunity for buying the likes of Antofagasta (LON:ANTO) or Glencore (LON:GLEN) on further dips.

However, Liberum reckons greater value is to be found amongst the more significant of the companies with large projects moving through the development stages.

On this thinking Liberum highlights Asiamet (LON:ARS) and Solgold (LON:SOLG) as offering the best value, while it recommends steering clear of KAZ Minerals (LON:KAZ), on the basis of Russian risk.

Another company worth considering is Kincora Copper (CVE:KCC), which is at an earlier stage, but which may well be sitting on most of the useful ground in the next major district play to emerge in copper mining: Mongolia.

Liberum reckons most of the speculative positions that were taken up in copper in 2018 have now washed out through the system. However, in terms of pricing, negotiations between the US and China will continue to be crucial.

“We believe the issues around industrial output can and probably will be solved, however the controls on intellectual property transfers will be far greater hurdles and we do not expect to see a solution in the next six months,” the broker said.

 

 

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