Copper prices may have hit a floor this year, but as fundamentals finally shift in the metal's favor and despite a strong start to 2016, investors should treat any upside with caution, market sources told Platts this week.
A return of investor sentiment this month for risk-on assets such as base metals has seen copper on the London Metal Exchange recover almost 15% since hitting seven-year lows in mid-January, trading above $5,000/mt this week for the first time since November.
But most market participants, who have come together this week for a number of international copper conferences in Lisbon, are reluctant to get too carried away.
"Let's not get too carried away with a price run, fundamentals have definitely improved but for any prolonged recovery further action is needed," said one trader on the sidelines Wednesday.
Lower spot prices have continued to put the brakes on global copper production this year, with closures reported in Africa, China and Chile announced in the last few months, on top of significant cutbacks in 2015.
Chile's copper output in January declined by 14% compared to a year earlier, to just over 450,000 mt, its biggest monthly fall in nearly five years, according to government data released last week.
With production halted at the Escondida mine, Chilean copper production is also expected to be low in February.
"Even if one considers output in January 2015 as relatively high, there has been a consistent trend of decline output over the past 12 months," Australia New Zealand Bank said in research this week.
ANZ is expecting a decline of 0.3% of total supply in 2016, following growth of around 3% in 2015.
And as demand recovers into 2016, supported largely by the Chinese power sector, the bank forecasts a supply deficit from 2017 into 2018.
However, production is still growing in some countries, notably Peru, where several new projects including the expansion of Cerro Verde and new mines Constancia and Toromocho, resulted in a 22% increase in production in 2015 to 1.63 million mt.
"Most of the market are wary of early price increases this year stalling production cuts that are still sorely needed," said an analyst this week.
"And it is not just copper prices, but lower production costs in dollar terms that are helping suppliers," he added.
While the most recent data from the International Copper Study Group for the first 11 months of 2015 showed a production surplus of around 50,000 mt, compared with a production deficit of around 545,000 mt in 2014, there is clearly further for the industry to go.
But as well as supply, demand has also improved.
China's February copper imports, although down on a monthly basis owing to the country's week-long Lunar New Year holiday, were 49% higher than a year earlier at 420,000 mt, according to data published by China's National Bureau of Statistics Tuesday.
"Chinese demand for commodities in general and metals in particular is so far showing no signs of weakness," said Commerzbank this week, commenting on the announcement.
"Clearly the Chinese government is widely expected to implement sizeable infrastructural programs in a bid to achieve its declared growth target," the bank added.
Imports of refined copper and products were even higher in February, up 147% on the year, according to government statistics.
Most market participants put this down to opportunistic buying due to low prices, as well as a positive arbitrage between London and Shanghai.
"As we have seen previously, the Chinese take a long-term view of copper prices and strategic buying increases when prices weaken enough." "This will always keep a floor on prices falling too low, which can keep inefficient suppliers in business," a broker told Platts.
Three-month LME was last bid at $4,897/mt Thursday 1030 GMT basis LMEselect.
