BASE METALS

"We ... see a market that is improving but not fully healed"

It has been an exciting year for metals, with commodities defying forecasts and moving higher and, as a result, the industry had its confidence back at LME Week 2017.

Staff reporter
Cautious optimism: Barclays is not ready to pop open a bottle of champagne yet

Cautious optimism: Barclays is not ready to pop open a bottle of champagne yet

 Barclays Research said 2016's cautious optimism had been replaced by "full-on excitement, as the industry hyped electric vehicles, mounting deficits, and a strong global economy as enough to keep prices high".

However, the bank warned that, although there was truth in these supply and demand factors, caution was needed going into 2018.

"We think investors should look past the headlines and into the details to see a market that is improving but not fully healed," it said.

According to rhetoric at LME Week, Barclays said copper remained "the industry's favourite base metal", with the soundest long-term fundamentals.

A number of large players, including Freeport McMoRan (US:FCX) chief operating officer Red Conger, Codelco chairman Oscar Landerretche and BHP (LN:BLT) president of operations for its Minerals Americas division Daniel Malchuk, talked up copper. 

While the bank agreed the current level of inventories, continued global growth, resilience from China, and the upcoming EV revolution gave reason for optimism, it remained cautious, especially over the next year.

"Simply put, we think the market is once again mistaking the prospect of Chinese demand, confusing a rebound driven by loose credit for a return to the ‘good ol' days'," Barclays said. 

"As the credit stimulus wears off, we think demand conditions for copper will cool in 2018, resulting in weaker year-on-year demand in China and globally (as new supply comes online)."

It backed this view up by noting that China's real estate sector, which accounts for about one third of overall copper demand, was showing signs of strains, with completions turning negative. 

"We find a conference that is so excited to have a market return to optimism that it is overlooking potential signs of weakness ahead … So while we think conditions have clearly improved since LME Week 2016, we're not ready to pop open the bubbly just yet," Barclays said.

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