Disruption Fires Up Copper Bulls

By Barry Fitzgerald | More Articles by Barry Fitzgerald

Unlike iron ore, the bulls are out in force when it comes to copper.

But predictions that iron ore prices will fall sharply in response to rising supply have been so wrong for so long that it has got to be wondered what confidence should be given to the predictions of copper price strength, particularly as we’re essentially talking about the same bunch of price picking pundits.

It’s an important consideration when it comes to stock picking as iron ore equities are currently being priced as if $US50 a tonne prices are around the corner ($US82 a tonne currently), while the copper equities are getting the free-carry of expectations that the copper price has $US3 a pound written all over it ($US2.70 a pound currently).

Having said all that, there does seem to more good reasons for copper to march higher than there is for iron ore to hold on to price strength in the year ahead. The growing copper optimism is based on a rash of supply disruptions.

UBS picked up the theme during the week. “Disruption is affecting production at some of the world’s major copper mines which account for 10 per cent of global supply,’’ UBS said in support of its forecast for copper prices to average $US3 a pound in 2017.

Permit issues at Grasberg in Indonesia, the threat of strike action at Escondida in Chile, and the impact of floods in Peru are “painting a picture of a disrupted start to copper supply in 2017.’’

“This is starkly different to 2016 where disruptions where very low at about 3 per cent (600,000 tonnes of global mine supply) against a historical average of 5 per cent (one million tonnes).’’

Assuming a return to “normal’’ disruption in 2017 offsets incremental supply growth of about one million tonnes, UBS arrives at a forecast 500,000 tonne supply deficit after adding in demand growth. In this market, OZ Minerals (ASX:OZL) is its preferred exposure. Read More. 

Avanco Resources (ASX:AVB):

Fair enough too. But greater leverage to the copper thematic could well be found amongst the juniors, particularly those with established production, little or no debt, and a well mapped out plan for strong growth.

It is on those points that Brazil-focussed copper/gold group Avanco Resources has been kicking goals, with the market responding by pushing it up from 6 cents a share back in November to the 9.1 cents a share level this week. Read More.

 

Barry Fitzgerald

About Barry Fitzgerald

Barry FitzGerald has covered the resources industry for 30 years. His column highlights the issues, opportunities and challenges for small and mid-cap resources stocks - most recently penned his column for The Australian newspaper and before that, The Age.

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