An increasingly strong US dollar is likely to push copper prices lower in 2016, an analyst said Thursday, despite recent bullish developments such as production cutbacks.
"The dollar is likely to strengthen more and that will be a big downward pressure to prices in 2016," CRU analyst Matthew Wonnacott told the American Copper Council conference in Fort Lauderdale, Florida. "The dollar is definitely something we have to watch next year in terms of copper prices."
Wonnacott forecast copper prices would average $2.17/lb in 2016. COMEX copper averaged $2.5950/lb through the first nine months of 2015.
Given the US Federal Reserve's looming shift to higher interest rates, "there is room for the dollar to strengthen further and there is a risk on the horizon for the dollar to strengthen versus the [Chinese Yuan]. All of this is a negative for copper prices," Wonnacott said.
Overall, global copper consumption remains weak and he US is looking at just 2.3% growth in copper demand next year, the analyst said.
Copper prices were recently bolstered by news of producers, particularly Glencore, planning significant mine-production cuts, Wonnacott said. However, on the other side of the scale, he said, were the robust dollar, higher production costs for companies and a weak overall macro-economic picture. Wonnacott also forecast lower US copper cathode premiums in 2016, noting that contract premiums have trended lower in China, which means contract premiums in the US are likely to follow suit.
Another drag on 2016 premiums might be the current price arbitrage, which will make it more attractive for Chinese and South American producers to sell copper in the US market, he said.
Wonnacott said China, the pivotal player accounting for about 45% of global copper consumption, will see somewhat better demand growth in 2016, in terms of "policy-driven consumption" such as government stimulus measures that will boost demand in areas like railways and the power grid.
However, residential construction in China is likely to remain in a slump, he said.
But "massive destocking" in China in sectors like the automotive industry will lift demand growth, he added.
