Dr Copper’s diagnosis for the global economy looks pretty dire. Futures prices for the economically sensitive metal are down by almost a third since their high earlier this year.
By Garry White, and Emma Rowley
7:30PM BST 09 Oct 2011
The metal is regarded as a leading indicator of the global economy. It is used in the construction of buildings, power generation and transmission and the manufacture of consumer electronics. Copper wiring and plumbing are integral in these items. So, the higher the demand for copper, the more buoyant the global economy is said to be. That’s why the recent fall off a cliff is of great concern. However, there are other dynamics at work because copper is the metal with one of the tightest supply and demand fundamentals around. Last week, the International Copper Study Group (ICSG) released its latest assessment of copper market dynamics – and its view should be supportive of the price.
According to preliminary ICSG data, global growth in copper demand for 2011 is expected to exceed global growth in copper production, with a production deficit of about 200,000 metric tonnes of refined copper expected for the year. For 2012, ICSG data have forecast a deficit of about 250,000 tons as supply growth continues to lag demand growth. By 2013, however, increased production and lower growth in demand are expected to yield a nearly balanced market. ”There is still a risk of demand figures being subject to additional downward revisions,” Carsten Fritsch, a metals analyst at Commerzbank, said. “For one thing, there is a general economic slowdown, especially in the OECD countries, and comparatively high copper prices could already have prompted customers to opt for substitutes on a considerable scale,” he added.
“The research group CRU expects a drop in demand this year of up to 500 thousand tons, or 2.5pc, because plastics, aluminium and fibre optics are viable substitutes,” Mr Fritsch noted. ”However, with China’s economy still going full steam ahead, and a lower availability of scrap metal, which is hampering growth in secondary production, we still envisage a structural deficit on the copper market this year and next,” he said.The ICSG also noted that there were downside risks to its forecasts. “Numerous factors including a world economic slowdown, European Union sovereign debt issues, political disturbances in the Middle East and North Africa, and market price volatility create significant uncertainty, and the global market balances could vary from those projected. “The market has also been hit by copper from China as well. “Copper stood under the influence of Chinese destocking through 2011, which reduced the country’s net imports by around 360,000 tons in recent months,” Michael Widmer, Metals Strategist at BofA Merrill Lynch, said. ”With excess stocks now extremely low and assuming no hard landing in China, we anticipate that the country’s metal purchases will increase,” he added.
However, Mr Widmer was not so bullish yet on the copper price. “Yet, in a falling market, pre-emptive large-scale buying would be unprecedented,” he said, “Factoring in also a likely stabilisation of the US economy through 2012, we believe more visible upward pressure on prices will not emerge until then. “So it appears that the market at the moment is being driven by sentiment more than the fundamentals – but this is the case in equity markets too. Commodities and equities currently appear to be discounting a deep and troublesome slump. So all eyes remain on Europe to see if the politicians can fix the banking system – because that’s what it needs to turn these markets around. It’s not all doom and gloom, however. Thursday and Friday saw prices bounce as hopes of a European resolution grew as traders bet that low prices would prompt China to restock. However, a sustained rise in prices does not appear to be on the cards just yet.
Chile boosts copper production with £43bn investment programme
Almost a year to the day since the last of the 33 miners was pulled from Chile’s collapsed San José mine, the world’s biggest copper producer wants the eyes of the world to be on its mining industry for a different reason. In town for London Metal Exchange week, the industry get-together, the country’s mining minister Hernan de Solminihac was spreading the message that the industry, responsible for 20pc of Chile’s gross domestic product (GDP), is set for expansion – with improved standards to boot. The government is targeting $67bn (£43bn) of investment to upgrade existing mines and develop new ones in Chile over the next eight years, with plans to retrain people from other industries to avoid skills shortages. The aim is to increase copper production from an annual 5.4m metric tonnes to 7.8m metric tonnes, he said. Mr de Solminihac held that the copper price will shoot back up when the problems around Europe and the US are resolved. “When this turbulence passes, the price will recover – until the new mining projects which will boost supply come into operation, which will bring the price of copper down more fundamentally,” he said. On safety, he said progress on improved procedures was helping to halve the fatality rate from accidents. “We need to continue – each life is important,” he said.