Copper Prices Add To Gains While Zinc In Range Of Record

Copper rose Monday, and came within a few pennies of the $3/pound mark in New York trading. This is the highest price for copper since 2014, and there appear to be a number of factors supporting its rally off June lows. Most of the other base metals have followed copper higher, and zinc is close to the record highs it set in 2007.

The rise in price for zinc seems to be fueled by fundamental factors, but in for copper, the price may be due to a number of reasons. There have been supply worries for copper, and some of the major producers of copper are having trouble. Speculators have also been entering the copper market, and they may not stick around once the rally loses steam.

China's Contribution

There has been a lot of doubt surrounding the Chinese growth narrative, but it looks like economic expansion in the Middle Kingdom is alive and well. The June Chinese PMI looked good, and Q2 GDP also surprised on the upside. This would suggest that the rise in prices for industrial metals has a firm base, and isn't just speculation.

The Chinese have also been moving toward cleaner ways to produce copper and aluminum, and this has far reaching implications. China is the world's largest producer and consumer of copper, and a recent law will severely curtail the importation of low grade scrap material. This means that they will need access to better copper sources, and this would put pressure on the copper price to the upside.

Zinc is commonly used for the galvanization of steel products, and many market watchers cite the continued spending on Chinese infrastructure as one of the reasons that zinc is challenging its record price. Unlike copper, the stock levels on zinc on the LME are dropping rapidly, and there really isn't a large surplus of it anymore. This could mean much higher prices for zinc in the medium term, if demand remains constant at these levels.

Supply Worries

Freeport-McMoRan's Grasberg super mine in Indonesia is an example of the problems that the supply side for industrial metals are facing. The mine is one of the largest in the world, and can be seen from outer space. Unfortunately for Freeport, they are having ongoing issues with the labor force in the area. Over the last week violence broke out at the gates of the mine, and police were called in to break up the mob, some of whom may be disgruntled workers.

Freeport denies there is a organized strike, but these despite this, the violent mob armed themselves with weapons, and prevented anything from leaving the mine. On the plus side, the Government of Indonesia recently agreed to allow Freeport's Indonesian arm to continue to operate the mine until 2041, as the current agreement was set to expire in 2021. Police were able to remove the protesters, and Freeport issued a statement that production from the mine would return to normal on Monday.

While this is good news for copper buyers, the production rate from Grasberg probably remain below optimal levels. With problems like this in the copper market, it is difficult to say whether the current surplus will remain in the marketplace.