Copper:Deficits emerging,but can copper miners start to deliver?

Market shifting to deficit, but more self-improvement needed.

    After overhauling our global copper supply-demand and Chinese demandframeworks, we now forecast the copper market to be in deficit over themedium-term (from near-term surpluses previously). With market tightnessreducing inventory levels over 2018, we expect prices to rebound by 2019e.

    Nevertheless, we want to see the copper miners drive their own valuegeneration through better opex performance and capex discipline. FirstQuantum (Buy, TP CAD 18) remains our top pick in the subsector.

    Upgrading Chinese demand forecasts; expect deficits now from 2017 onwards.

    With a more bottom-up China demand framework, we increase our mediumtermChinese demand forecasts to ~3.5% pa from ~2% pa previously givengreater confidence around grid investment as well as revisions to our A/C andEV related forecasts. However, we maintain our 2017e China demand forecastat ~3%. After adjusting for more mine disruptions this year and greater risks tomine supply next year, we now forecast the copper market to turn to deficit in2017 and remain so through the medium-term. We forecast copper prices willrise from ~260 USc/lb in 2018e to ~300 USc/lb in 2019e.

    Also, the near-term indicators also appear supportive for copper prices.

    Although spot premia have lost momentum, scrap discounts continue tonarrow and cancelled warrants and Chinese semis mill utilisation remain highwhile semis mill raw material inventories continue to fall.

    Supply side risks already adding up for 2018: strikes, geopolitics, and restarts.

    Although the supply disruptions experienced in H1 have subsided, our analysisindicates greater disruption potential over the next 12-18 months compared toH1 this year. First, Chile (~1/3 of global supply) will have more mine supplyfacing labour renegotiations in 2018 than 2017, thus risking greater strike-ledlosses just as Escondida finally recovers from its H1 17 strike. Second,geopolitical factors, especially in the African Copperbelt (~10% of globalsupply) could see mines impacted if the political outlook deteriorates further.

    Although the 2015/16 downturn saw ~850 ktpa of loss-making mine supplytaken offline (~4% of global supply), ~400 ktpa is scheduled to come backonline during 2018-19.

    Growth back on the agenda, but more work still needed on opex performance.

    More copper miners are now shifting their focus back to growth. Althoughmost projects are at a relatively early stage, we expect many miners toadvance projects closer to board approval over the next 12-24 months.

    However, the copper miners have yet to demonstrate they will not repeat thesame mistakes of the last cycle, in our view. Instead, we believe copper minersneed to focus more on opex performance, where they have lagged behind theirbulk peers over the past several years (ie labour & equipment productivity).

    FQM top copper pick; also Buy SFR; Sell ANTO, KAZ; Hold FCX, OZL, & BOL.

    Despite now taking a more positive view for the copper market, we remainrelatively Neutral on the copper subsector as we want to see greater selfimprovementfrom the subsector before moving overweight. We reiterate FirstQuantum and Sandfire as our only two Buy rated copper miners. We increaseour KAZ TP to 400p from 350p given revisions to our longer-term productionprofile.