Credit Suisse sees potential for copper to outperform, likes Glencore

Credit Suisse projected slowing copper supply growth over the medium-term following the latest quarterly production updates and guidance from the miners under its coverage, leading its analysts to single out Quantum Minerals, Lundin, Boliden and Glencore as its preferred names.

Supply grew strongly over the first nine months of 2016, but output figures for the fourth quarter and guidance were weaker than expected with large producers Freeport, BHP and Quantum Minerals lowering their outlook for production in 2017 and beyond, the investment bank said.

The overall picture was one of "rapidly decelerating" mine supply, which the Swiss broker forecast would shrink 2% in 2017 following growth of six to seven per cent in 2016.

In 2018 there would be a rebound, but followed by a sharp slowing in the level of incremental supply growth from 2019/2020.

So while demand conditions were the main driver of the overall commodity cycle, the past four years had seen a tight relationship between rates of annual supply growth and commodity price performance, the broker explained.

Hence, "in 2017, we see the potential for copper to outperform bulks as it did in 2014 when supply also slowed sharply."

As regarded equities in the copper space, the copper price embedded in the 'pure plays' was far more bullish than for the diversified miners, the Swiss broker said.

"Across the major pure plays we estimate the stocks are discounting close to 300 cents (roughly 10% above spot [prices])."

"From the pure plays our preferred names are Quantum Minerals, Lundin and Boliden. From the large caps we like Glencore for its high copper and base metal exposure."