Copper’s sustainable price between $8,00 and $8,500 – Standard Bank
A strong sell off across the commodities complex has pushed copper prices down significantly but, Standard Bank’s Walter de Wet says, fundamentals remain positive for the metal.
GEOFF CANDY: Welcome to this week’s edition of Mineweb.com’s Metals Weekly podcast. Joining me on the line is Walter de Wet – he’s the head commodities research at Standard Corporate and Investment Bank. Now Walter we’ve just seen copper over Monday falling below the $7,000 level for the first time in 15 months. Clearly there’s been a lot of selling across commodity markets – indeed across markets in general over the last few days – whats going on in the copper market – why are we seeing such significant sell offs?
WALTER DE WET: Yes absolutely – we’ve seen the big sell off of 6% on Thursday, 6% on Friday and another 6% this morning and it’s not only copper, in commodities in general. To a large extent we have seen base metals in general coming under pressure – not only because of what’s happened in Europe, but also certainly what we see as slower demand in China. The monetary tightening in China specifically by the PBOC (People’s Bank of China) has resulted in a lot of the fabricators domestically running down their inventories – for example copper – but other base metals too. But what has triggered even more selling over the past two days, especially this morning [Monday], has been margin calls where when copper falls a lot, people are forced to liquidate long positions which obviously just push down metals prices down even further. So that is why we have seen this severe move of 6%, 7%, 8% every day and to some extent it seems that it’s stabilising at least for now.
GEOFF CANDY: Take us through the way it’s working at the moment, because from what I can see, we’re seeing more short sellers than we were before, but the longs haven’t really changed.
WALTER DE WET: Absolutely – it is interesting if you look at, for example, the US data – the COMEX copper contract trades in the US for the first time since mid-2009 – speculative positions or non-commercial positions is net short which does indicate that maybe not your commercial users of copper, but certainly the investor community does believe that copper is coming down and I’ve mentioned a couple of reasons. But also what we think is not such a bearish view on copper, but also typically what we see happening to some extent is, for example, if equities come under pressure – call it mining equities – we would see some of the equity investors come and hedge their exposure to long positions to equities in the commodity market – and then of course for example they would short copper or aluminium and that is helping the short positions build in certain commodities. This has resulted in copper trading short in terms of speculative outlook which obviously is not very bullish for a metal like copper – and as I mentioned, it is the first time since mid-2009 or just basically at the middle of the previous recession. So certainly from a growth perspective, it does not look great.
GEOFF CANDY: How much of this has to do with the financialisation of copper because we’ve some conflicting reports as to the fundamental demand of copper, and how much is being stored in warehouses for example and that kind of thing?
WALTER DE WET: Well these declines and where the copper price is now – you still have to put it in relative terms or put it in perspective at call it $7,200 where it is trading at the moment, it’s still well above the cash costs or the marginal costs of production which we currently think, if you look in terms of cash costs it’s probably around $5,500 and if you include capex, your marginal producer is probably around $6,500/tonne. So even with copper at current levels, all of your miners in the world will still make good money. So yes, copper has been under pressure, but it’s still fundamentally – we do believe it’s a market which is in a shortage for this year as well as a shortage for next year. So fundamentals shows that if you look at the cost curve, but as you pointed out no doubt there is a big financial speculative component in all of these commodities these days and it does play a big role in making commodities more volatile. We’ve also seen in China for example, where copper is especially used more and more as a tool to get access to financing which the big construction companies cannot get via banks. So certainly if copper is moving up and down, it’s not only because of fundamentals, but also because of speculative movements in the market.
GEOFF CANDY: Let’s talk about China briefly, because clearly they account for a significant portion of demand these days, and there has been some concern about stockpiling in China and indeed how much demand we are actually going to see there in terms of the next couple of months because there is potential perhaps for them to wait and see what happens in Europe before they come back into the market.
WALTER DE WET: Yes, we’ve seen stockpiles building, especially of copper above $9,000 going to $9,500 at the beginning of the year – with copper close to $10,000 stockpiles have definitely been building. We’ve seen a build-up in LME inventories, we’ve seen a slight build-up in Shanghai’s futures exchange inventories, but where the big build up is, is not so much in these two warehouses, but especially in your bonded or your non-visible warehouses where, for example, average levels in China we think is around 300,000 metric tonnes – and in March this year, with copper at $10,000/tonne we believe that these stockpile levels have grown all the way to 700,000 metric tonnes which is a lot. It was a clear indication that copper is not consumed. Currently with prices where they are, these inventories are being drawn down a bit and people are starting to buy and consume again. But no doubt, we’ve seen a big build-up in inventories and we think we will see a big build-up once again if copper prices rally from current levels too fast, because we do think that yes there is demand growth in China, and it is definitely stronger than for example in the US and Europe but it is not strong enough to sustain a copper price well above $9,000 going on $10,000.
GEOFF CANDY: What are your expectations of prices in all the turmoil…?
WALTER DE WET: Yes, we think that copper prices will continue to struggle at least for the remainder of the year and probably for the first quarter of next year too, and at that stage we expect prices to be around $8,000 or $8,500 for the next six months, rising towards $9,000 to $9,200 for an average next year. So certainly we are not strong firm believers that we’re going to see a copper price of, for example, $12,000. Yes, it might trade for a couple of weeks, but we are firm believers that’s not sustainable – we don’t think that demand is going to be strong enough in Europe, the US and also in China at those levels. But once again, if you put the copper price at say $9,200 you’ve got to look at it in perspective – it is still a very high copper price if you look at where the cost of production sits.
GEOFF CANDY: What is a sustainable price for the metal?
WALTER DE WET: Currently we think a sustainable price is probably closer to between $8,000 and $8,500 and I’ll tell you where we get that figure – it’s if you look at copper prices – or copper prices in renminbi – in Chinese currency, at least since 2006, copper prices, if you translate it back into dollars – have varied between $7,500 and $8,500/tonne in local Chinese currency – that’s where we think the prices are at a sustainable level and the Chinese do seem fairly comfortable with that price level. As soon as we move above that for an extended period of time, the demand does seem to fall away.
GEOFF CANDY: Looking at the supply side of the market, there was some indication that part of the speculative demand for the metal was predicated on the tight supply situation, what is you view now given the concerns in Europe and of course the potentially weaker demand in China?
WALTER DE WET: Absolutely – make no mistake, the supply side issues remain and we do not see any substantial big projects coming online – at least before mid-2013. So for that reason too at this stage we think that copper will be in a deficit – of just shy of 200,000 metric tonnes this year and probably around 250,000 metric tonnes next year. Therefore fundamentally, we do think that supply will not match demand and for that reason too, we think that copper will remain well above its cost of production and if we see a slight slide in prices like we have seen over the past couple of days, we think that it’s unlikely to be long-lived especially if we go closer to $6,000/tonne. We think it will rebound fairly quickly because we need this marginal production – we need these projects to go on. It remains – we continue to see strikes at Grasberg for example, we continue to see problems specifically at Codelco’s mines and that is likely to continue well into 2012.
GEOFF CANDY: What did you make of comments that given the higher prices we’re likely to see increased substitution which will probably eat into demand?
WALTER DE WET: The big threat for copper substitution must come from aluminium and especially in wiring cables where possible. Fortunately for copper it is one of those metals where substitution is definitely possible but the extent to which you can push substitution is also limited. Once again, once we get closer to $10,000/tonne in the current economic environment, there’s definitely a lot of substitution taking place – for example the first quarter of this year with copper close to $10,000, we think that we’ve probably seen around 200,000 metric tonnes of copper being substituted away for aluminium. And that is enough if we’re going to see copper at a high price – call it $10,000 for over a year, it is more than enough to push the copper market from a deficit into a balanced or even a surplus market. So the threat is there and yes, when the copper price rises too fast when demand is not there, we think it will happen and it should keep a lid on prices.
GEOFF CANDY: Just two questions to close off with – firstly what do you see as the best and worst case scenarios for copper over the next 12 to 18 months?
WALTER DE WET: The best case these days is the base case. We think that if we’re going to see a copper price averaging just above – between $9,000 and $9,200/tonne for next year, that it will be a good price for copper. It would not just be a good price for consumers, especially for consumers in China as I said, because if you translate it into renminbi they do seem fairly comfortable at that level but it would also be a good price for producers. Worst case is – of course if you start looking at worst case, you’ve got to look at where the marginal producers sit and as I mentioned, if you look at capex level we probably think $6,000 to $6,500 is certainly a level where copper can fall to and then stay there for a while. If we of course stay there, then some of the projects that are supposed to come online in 2013, run the risk of being stopped or pushed further into the future and could just open up even more downside for copper. But yes, I believe we’ve got to be in this environment where there’s great uncertainty – we think that a good case would be for copper to be around $9,300 next year.
GEOFF CANDY: And finally, where does this leave copper relative to the base metals complex?
WALTER DE WET: At the current moment, if we look at where the metal sits and once again when the price has fallen like this, we look at the where the marginal production sits. In relative terms, the metals with the least downside from a cost of production perspective, are probably lead and zinc. We think that while those can come under pressure, it’s probably not too much, but certainly once again both those metals, if prices rally too much it will be speculative demand. We think that metals with the most upside is still copper. Copper can go from the current $7,200 all the way to $9,000 to $9,200 which is substantial upside. Therefore, on a 12-month horizon we still like copper – we still like aluminium because we think crude oil will also trade higher over the 12-month horizon. And then, third you’ve got to probably on a 12-month view look at the possibility of lead where into 2013 we see a deficit market…
GEOFF CANDY: Welcome to this week’s edition of Mineweb.com’s Metals Weekly podcast. Joining me on the line is Walter de Wet – he’s the head commodities research at Standard Corporate and Investment Bank. Now Walter we’ve just seen copper over Monday falling below the $7,000 level for the first time in 15 months. Clearly there’s been a lot of selling across commodity markets – indeed across markets in general over the last few days – whats going on in the copper market – why are we seeing such significant sell offs?
WALTER DE WET: Yes absolutely – we’ve seen the big sell off of 6% on Thursday, 6% on Friday and another 6% this morning and it’s not only copper, in commodities in general. To a large extent we have seen base metals in general coming under pressure – not only because of what’s happened in Europe, but also certainly what we see as slower demand in China. The monetary tightening in China specifically by the PBOC (People’s Bank of China) has resulted in a lot of the fabricators domestically running down their inventories – for example copper – but other base metals too. But what has triggered even more selling over the past two days, especially this morning [Monday], has been margin calls where when copper falls a lot, people are forced to liquidate long positions which obviously just push down metals prices down even further. So that is why we have seen this severe move of 6%, 7%, 8% every day and to some extent it seems that it’s stabilising at least for now.
GEOFF CANDY: Take us through the way it’s working at the moment, because from what I can see, we’re seeing more short sellers than we were before, but the longs haven’t really changed.
WALTER DE WET: Absolutely – it is interesting if you look at, for example, the US data – the COMEX copper contract trades in the US for the first time since mid-2009 – speculative positions or non-commercial positions is net short which does indicate that maybe not your commercial users of copper, but certainly the investor community does believe that copper is coming down and I’ve mentioned a couple of reasons. But also what we think is not such a bearish view on copper, but also typically what we see happening to some extent is, for example, if equities come under pressure – call it mining equities – we would see some of the equity investors come and hedge their exposure to long positions to equities in the commodity market – and then of course for example they would short copper or aluminium and that is helping the short positions build in certain commodities. This has resulted in copper trading short in terms of speculative outlook which obviously is not very bullish for a metal like copper – and as I mentioned, it is the first time since mid-2009 or just basically at the middle of the previous recession. So certainly from a growth perspective, it does not look great.
GEOFF CANDY: How much of this has to do with the financialisation of copper because we’ve some conflicting reports as to the fundamental demand of copper, and how much is being stored in warehouses for example and that kind of thing?
WALTER DE WET: Well these declines and where the copper price is now – you still have to put it in relative terms or put it in perspective at call it $7,200 where it is trading at the moment, it’s still well above the cash costs or the marginal costs of production which we currently think, if you look in terms of cash costs it’s probably around $5,500 and if you include capex, your marginal producer is probably around $6,500/tonne. So even with copper at current levels, all of your miners in the world will still make good money. So yes, copper has been under pressure, but it’s still fundamentally – we do believe it’s a market which is in a shortage for this year as well as a shortage for next year. So fundamentals shows that if you look at the cost curve, but as you pointed out no doubt there is a big financial speculative component in all of these commodities these days and it does play a big role in making commodities more volatile. We’ve also seen in China for example, where copper is especially used more and more as a tool to get access to financing which the big construction companies cannot get via banks. So certainly if copper is moving up and down, it’s not only because of fundamentals, but also because of speculative movements in the market.
GEOFF CANDY: Let’s talk about China briefly, because clearly they account for a significant portion of demand these days, and there has been some concern about stockpiling in China and indeed how much demand we are actually going to see there in terms of the next couple of months because there is potential perhaps for them to wait and see what happens in Europe before they come back into the market.
WALTER DE WET: Yes, we’ve seen stockpiles building, especially of copper above $9,000 going to $9,500 at the beginning of the year – with copper close to $10,000 stockpiles have definitely been building. We’ve seen a build-up in LME inventories, we’ve seen a slight build-up in Shanghai’s futures exchange inventories, but where the big build up is, is not so much in these two warehouses, but especially in your bonded or your non-visible warehouses where, for example, average levels in China we think is around 300,000 metric tonnes – and in March this year, with copper at $10,000/tonne we believe that these stockpile levels have grown all the way to 700,000 metric tonnes which is a lot. It was a clear indication that copper is not consumed. Currently with prices where they are, these inventories are being drawn down a bit and people are starting to buy and consume again. But no doubt, we’ve seen a big build-up in inventories and we think we will see a big build-up once again if copper prices rally from current levels too fast, because we do think that yes there is demand growth in China, and it is definitely stronger than for example in the US and Europe but it is not strong enough to sustain a copper price well above $9,000 going on $10,000.
GEOFF CANDY: What are your expectations of prices in all the turmoil…?
WALTER DE WET: Yes, we think that copper prices will continue to struggle at least for the remainder of the year and probably for the first quarter of next year too, and at that stage we expect prices to be around $8,000 or $8,500 for the next six months, rising towards $9,000 to $9,200 for an average next year. So certainly we are not strong firm believers that we’re going to see a copper price of, for example, $12,000. Yes, it might trade for a couple of weeks, but we are firm believers that’s not sustainable – we don’t think that demand is going to be strong enough in Europe, the US and also in China at those levels. But once again, if you put the copper price at say $9,200 you’ve got to look at it in perspective – it is still a very high copper price if you look at where the cost of production sits.
GEOFF CANDY: What is a sustainable price for the metal?
WALTER DE WET: Currently we think a sustainable price is probably closer to between $8,000 and $8,500 and I’ll tell you where we get that figure – it’s if you look at copper prices – or copper prices in renminbi – in Chinese currency, at least since 2006, copper prices, if you translate it back into dollars – have varied between $7,500 and $8,500/tonne in local Chinese currency – that’s where we think the prices are at a sustainable level and the Chinese do seem fairly comfortable with that price level. As soon as we move above that for an extended period of time, the demand does seem to fall away.
GEOFF CANDY: Looking at the supply side of the market, there was some indication that part of the speculative demand for the metal was predicated on the tight supply situation, what is you view now given the concerns in Europe and of course the potentially weaker demand in China?
WALTER DE WET: Absolutely – make no mistake, the supply side issues remain and we do not see any substantial big projects coming online – at least before mid-2013. So for that reason too at this stage we think that copper will be in a deficit – of just shy of 200,000 metric tonnes this year and probably around 250,000 metric tonnes next year. Therefore fundamentally, we do think that supply will not match demand and for that reason too, we think that copper will remain well above its cost of production and if we see a slight slide in prices like we have seen over the past couple of days, we think that it’s unlikely to be long-lived especially if we go closer to $6,000/tonne. We think it will rebound fairly quickly because we need this marginal production – we need these projects to go on. It remains – we continue to see strikes at Grasberg for example, we continue to see problems specifically at Codelco’s mines and that is likely to continue well into 2012.
GEOFF CANDY: What did you make of comments that given the higher prices we’re likely to see increased substitution which will probably eat into demand?
WALTER DE WET: The big threat for copper substitution must come from aluminium and especially in wiring cables where possible. Fortunately for copper it is one of those metals where substitution is definitely possible but the extent to which you can push substitution is also limited. Once again, once we get closer to $10,000/tonne in the current economic environment, there’s definitely a lot of substitution taking place – for example the first quarter of this year with copper close to $10,000, we think that we’ve probably seen around 200,000 metric tonnes of copper being substituted away for aluminium. And that is enough if we’re going to see copper at a high price – call it $10,000 for over a year, it is more than enough to push the copper market from a deficit into a balanced or even a surplus market. So the threat is there and yes, when the copper price rises too fast when demand is not there, we think it will happen and it should keep a lid on prices.
GEOFF CANDY: Just two questions to close off with – firstly what do you see as the best and worst case scenarios for copper over the next 12 to 18 months?
WALTER DE WET: The best case these days is the base case. We think that if we’re going to see a copper price averaging just above – between $9,000 and $9,200/tonne for next year, that it will be a good price for copper. It would not just be a good price for consumers, especially for consumers in China as I said, because if you translate it into renminbi they do seem fairly comfortable at that level but it would also be a good price for producers. Worst case is – of course if you start looking at worst case, you’ve got to look at where the marginal producers sit and as I mentioned, if you look at capex level we probably think $6,000 to $6,500 is certainly a level where copper can fall to and then stay there for a while. If we of course stay there, then some of the projects that are supposed to come online in 2013, run the risk of being stopped or pushed further into the future and could just open up even more downside for copper. But yes, I believe we’ve got to be in this environment where there’s great uncertainty – we think that a good case would be for copper to be around $9,300 next year.
GEOFF CANDY: And finally, where does this leave copper relative to the base metals complex?
WALTER DE WET: At the current moment, if we look at where the metal sits and once again when the price has fallen like this, we look at the where the marginal production sits. In relative terms, the metals with the least downside from a cost of production perspective, are probably lead and zinc. We think that while those can come under pressure, it’s probably not too much, but certainly once again both those metals, if prices rally too much it will be speculative demand. We think that metals with the most upside is still copper. Copper can go from the current $7,200 all the way to $9,000 to $9,200 which is substantial upside. Therefore, on a 12-month horizon we still like copper – we still like aluminium because we think crude oil will also trade higher over the 12-month horizon. And then, third you’ve got to probably on a 12-month view look at the possibility of lead where into 2013 we see a deficit market…
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