The article was written by Blair Goldenberg, a Financial Analyst at I Know First, and enrolled in a Masters of Finance at Colorado State University.

Copper Industry Analysis

Summary

Peru’s Copper Expansion Plans

Will the Current Copper Rally Continue?

International Copper The United States Zambia China

I Know First Copper Forecast

Peru’s Copper Expansion Plans

The Peruvian Toromocho mega-mine, owned by Chinalco, a Chinese company, is set to expand in the near future. President Xi Jinping visited Peru in order to sign trade agreements involving the mine. At this point, no one knows exactly how big the mine will expand to, but it is certain that Toromocho will inevitably become the world’s main copper manufacturer.

This specific mine already produces 120,000 tonnes of copper every year. Chinese copper manufacturers are looking abroad to find new copper mines because their output and growth on mining is decreasing. In the last three years, Chinese copper mines have only grown about 7.4%, compared to Peru’s copper mines yielding 23% in the same time frame.

Will the Current Copper Rally Continue?

According to Richard Coppleson, Bell Potter’s premier stockbroker, the copper industry is going to have it’s strongest monthly gains if it stays on track with projected 24% gain. Coppleson’s analysis of past performance is that copper tends to rise about 6% after a strong monthly rise, however; he found that after the rise and within three months, the commodity tends to drop 15%. This means that the copper industry generally has a large push forward, a leveling out period and then a drop, which essentially creates a sort of pattern for the industry. Coppleson is sure that the this is the pattern of the past and currently, the rise shows that manufacturing has increased globally. This may mean that it is going to become a trend rather than a coincidence. He also believes that this new rally in copper won’t last forever, and may in fact dwindle soon.

In order for copper to continue the rally, there would have to be some proof of an increase in demand or decrease in availability. With the expansion of the already gigantic Toromocho mega-mine, the possibility of decreasing availability equates to almost nothing. As for an increase in demand, there is very little evidence that points to it. The possibility that infrastructure updates with President-Elect Trump coming into office may point to an increase in copper but may prove to only be a small rise in a very minimal time period. However, other analysts think that the new plans will continue the rise in copper, “the rally is attributed to assurance by President-elect Trump that he would cut taxes and invest more in infrastructure, the core demand area for base metals. Another major development happened from China National Development and Reform Commission on November 11, which approved 85.6 billion yuan ($12.59 billion) for three railway projects, adding further to the demand outlook,” says Prathamesh Mallya, senior research analyst at Angel Broking.

Copper stocks in prominent exchange inventories have fallen recently as shown with the graph below.

International Copper

The United States

Freeport-McMoRan Inc. (FCX) is a natural resources company and the world’s largest publicly traded copper producer, has been up since they have been trying to lower their debt. Since the beginning of November, 2016, FCX has been steadily rising in the market and jumped in stock price around the 18th. This can be attributed, at least partly, to the above mentioned presidential election and increase in infrastructure. A more detailed analysis of FCX and the effect of copper on the company can be found here.

Zambia

In Africa, the Zambian Chamber of Mines is having serious issues with a proposed import duty on copper. They argue that it will negatively effect smelters in Africa’s second-biggest producer of copper and they are now asking the government to waive it the fees. Zambia doesn’t produce enough concentrates of copper, which is a mixture of rock that contains 40% copper. Zambia has to import extra materials from the Democratic Republic of Congo.

Glencore Plc, First Quantum Minerals Ltd. and Vedanta Resources Plc, companies in Zambia that own smelters, will lose revenue if the 7.5% duty is set in place. Mining companies in the Congo would then have to move business to the east because the duty would make smelting it in Zambia unprofitable and therefore illogical. This would essentially stop the production of copper in Zambia completely. If this were to happen, the main copper producers would lose immense amounts of business, thus pulling their companies out of Zambia completely. This would be reflected in not only the stock price for each company but also in the commodity price for copper as a whole. Felix Mutati, the Finance Minister, came up with the new import duty on November 11, 2016 in order to help increase government revenues and the import duty will take effect on January 1, 2017.

China

China is beginning to cut down on imports of copper. China is the world’s biggest consumer of copper so this will become a huge issue for the commodity price as well as the producers that China once purchased copper from. They are currently making copper within their borders by purchasing ore concentrate of the metal. In October, Chinese purchases on copper dropped, making it the lowest purchasing amount in 3 years. Just from last year, it has fallen 45%.

Output on copper from domestic smelter’s within China have gone up 8% in only 10 months. Chinese purchases of copper ore will continue to increase, by 2020 China will increase their purchases up 50% from 2014. Chinalco, the Chinese company that owns the mega-mine in Peru is the perfect example for importation of copper ore, the reduction of the actual mining of copper within the country, and the expansion of smelting output. If China owns companies that mine copper ore, then they can also receive that copper at a cheaper price rather than buying the ore from a different producer.

China’s strategy is actually very ingenious in that they own the entire copper making process for themselves. They purchase their ore from their own companies, thus fueling the Chinese economy, and they receive better deals in the same way. It’s like a citrus farmer making their own juices. If the farmer imported their citrus fruits from another farm, he would have to pay more than had he picked the fruit from his own farm. This would either reduce the profit margin or increase the price of the product. But because the farmer, or in this case China, is purchasing through their own channels, they are retaining more revenue.

I Know First Copper Forecast

I Know First is bullish on copper for the next year. This may be due to the fact that copper is up higher than it has been in years. It may also be attributed to the promise of rebuilding and movement of jobs back to the United States. Right now, the market on metals is volatile because of the current unknowns. The purpose of the I Know First algorithm is to specifically remove human speculation and error. The algorithm watches the market closely, building patterns, with about 15 years of data. Once the market fluctuation on metals settles, the copper industry may continue seeing a rise based on historical data. Since the recession, copper has been on the rise after a large drop in 2009, which then leveled out in 2011 and began to drop; now the copper industry may be seeing a rebound as the share price is still lower than the last 5 years.

How to interpret this diagram:

Signal

This indicator represents the predicted movement/trend of the asset; not a percentage or specific target price. The signal strength indicates how much the current price deviates from what the system considers an equilibrium or “fair” price.

Predictability (P)

This value is obtained by calculating the average correlation coefficient between the past predictions and the actual asset movement for three discrete time periods. The averaging gives more weight to more recent performances. As the machine keeps learning, the values of P generally increase.

Conclusion

Copper is seeing variable results depending on the country. Globally, however; copper has been strong this month and may possibly continue as Trump comes into office. China is a big player in the copper industry currently with their move to home grown copper smelting and acquisition and expansion of copper mines abroad. I Know First, despite some obstacles in the copper industry, is bullish on copper and continues to be for the next year.