Is copper heading for a fall?
While expectations of a deep supply deficit in the copper market led by strong demand from China have buoyed prices in the first half of the year, the reality of the situation doesn’t bode quite as well.At the beginning of the year, the copper price was buoyed by a belief that the market for the metal would remain in deep deficit throughout the year.
This belief was predicated on the expectation of a lack of significant mine supply growth and continued strong demand from Asia and, in particular, China.
But, as the VM Group writes in its most recent ABN Amro Metals Monthly publication, “The reality has been very different yet the price has remained fairly firm although volatile, trading in the $8,550/t-$9,850/t range since April.”
According to the report, a number of countervailing forces have conspired to create this volatility, including, mine supply disruptions, both labour and weather-related, which have had a positive effect on the price; monetary tightening by the Chinese government which has led to destocking and a “hand-to-mouth” approach to copper buying by Chinese consumers and “cyclic risk-on and risk-off trading based on EU and US macroeconomic issues, which has been both positive and negative.”
These forces, the VM Group says, “have – until now – played against one another, providing a cap and floor to the copper price for the past five months. But market conditions are rapidly changing, and for the worse.”
One of the big blows to initial expectations of a sustained supply deficit has been the lack of growth in apparent demand from China.
As the VM Group points out, refined copper imports over the first eight months of 2011 fell by 27% year-on-year, to an estimated 1.49 Mt, while implied copper consumption (refined production plus refined imports minus refined exports, and adjusted for visible stock changes) has weakened from an annual rolling high of 7.70 Mt in January 2011 to an estimated 7.51 Mt in August; a decline of 2.5%.
But, it says, this may be changing, “August’s copper demand level is the third successive month where China’s implied demand has increased from May’s low of 7.34 Mt. But on a global calendar year basis, this overall softening in Chinese demand has helped ease 2011 deficit projections and may have even pushed the market into surplus in some months.”
The big question now, as the VM Group says, is: “Will Chinese refined copper imports pick up enough in the short-term to stem a possible price correction based on ailing Western demand?”
As was seen in 2008, when Western demand fell off a cliff, Chinese consumers dived back into the market when prices fell but, only when prices had fallen substantially, to around $3,000 a tonne.
If Chinese consumers are able to stay out of the copper market while the economic conditions in the West worsen and, subsequently, copper demand in both the US and Europe continues to decline, then, the VM Group says, we are likely to see a sharp drop in prices of the metal.
But, because of the manner in which Chinese consumers came back into the market in 2008, it is unlikely that prices will be allowed to fall as far as they did the last time. The VM Group expects prices to decline to around $6,000 per tonne.
For the VM Group, the big unknown remains the secretive State Reserves Bureau (SRB), and “whether it might release some of its copper stocks to domestic consumers in order to prolong China’s absence from the market. It’s estimated that the SRB holds as much as 1 Mt of copper, and we should not forget that ~0.5 Mt held in SHFE and bonded warehouses. All this ‘available’ copper means that Chinese refined copper imports might not grow further from August’s levels. ”
It is, however, not just the demand side of the equation that looks poor for the copper market longer term. While the first half of the year saw significant supply disruptions, it is unlikely that the fourth quarter of 2011 and going into 2012 will see a similar tightness on the supply side. This is because the market has begun to respond to the higher prices and, indeed, the perceived supply deficit by bringing on new capacity.
As The VM Group says, “All in all, we estimate, and assuming no delays, that as much as 0.9 Mt/year of copper production from the ten largest capacity additions could come online in 2012. That translates into mine supply growth of about 5%. Net of attrition and closures, a possible further 0.8 Mt/year of copper production capacity could also come online, meaning that as much as 1.7 Mt/year of new supply could come to market in 2012, or more than 10% above current mine supply. Allowing for supply disruptions, we expect mine supply could in reality grow by 6% in 2012 and 5% in 2013.”
And, while prices could benefit in the short term from hopes that China is coming back into the market, further out, as the VM Group says, “copper’s fundamentals are weakening and we do not see any potential in 2012 for the LME three-month price to challenge February’s record nominal high of $10,160/t. Indeed, we anticipate substantial downside risk to the copper price in 2012, as global demand softens and mine supply – encouraged by the high price – finally responds.”
Author: Geoff Candy
This belief was predicated on the expectation of a lack of significant mine supply growth and continued strong demand from Asia and, in particular, China.
But, as the VM Group writes in its most recent ABN Amro Metals Monthly publication, “The reality has been very different yet the price has remained fairly firm although volatile, trading in the $8,550/t-$9,850/t range since April.”
According to the report, a number of countervailing forces have conspired to create this volatility, including, mine supply disruptions, both labour and weather-related, which have had a positive effect on the price; monetary tightening by the Chinese government which has led to destocking and a “hand-to-mouth” approach to copper buying by Chinese consumers and “cyclic risk-on and risk-off trading based on EU and US macroeconomic issues, which has been both positive and negative.”
These forces, the VM Group says, “have – until now – played against one another, providing a cap and floor to the copper price for the past five months. But market conditions are rapidly changing, and for the worse.”
One of the big blows to initial expectations of a sustained supply deficit has been the lack of growth in apparent demand from China.
As the VM Group points out, refined copper imports over the first eight months of 2011 fell by 27% year-on-year, to an estimated 1.49 Mt, while implied copper consumption (refined production plus refined imports minus refined exports, and adjusted for visible stock changes) has weakened from an annual rolling high of 7.70 Mt in January 2011 to an estimated 7.51 Mt in August; a decline of 2.5%.
But, it says, this may be changing, “August’s copper demand level is the third successive month where China’s implied demand has increased from May’s low of 7.34 Mt. But on a global calendar year basis, this overall softening in Chinese demand has helped ease 2011 deficit projections and may have even pushed the market into surplus in some months.”
The big question now, as the VM Group says, is: “Will Chinese refined copper imports pick up enough in the short-term to stem a possible price correction based on ailing Western demand?”
As was seen in 2008, when Western demand fell off a cliff, Chinese consumers dived back into the market when prices fell but, only when prices had fallen substantially, to around $3,000 a tonne.
If Chinese consumers are able to stay out of the copper market while the economic conditions in the West worsen and, subsequently, copper demand in both the US and Europe continues to decline, then, the VM Group says, we are likely to see a sharp drop in prices of the metal.
But, because of the manner in which Chinese consumers came back into the market in 2008, it is unlikely that prices will be allowed to fall as far as they did the last time. The VM Group expects prices to decline to around $6,000 per tonne.
For the VM Group, the big unknown remains the secretive State Reserves Bureau (SRB), and “whether it might release some of its copper stocks to domestic consumers in order to prolong China’s absence from the market. It’s estimated that the SRB holds as much as 1 Mt of copper, and we should not forget that ~0.5 Mt held in SHFE and bonded warehouses. All this ‘available’ copper means that Chinese refined copper imports might not grow further from August’s levels. ”
It is, however, not just the demand side of the equation that looks poor for the copper market longer term. While the first half of the year saw significant supply disruptions, it is unlikely that the fourth quarter of 2011 and going into 2012 will see a similar tightness on the supply side. This is because the market has begun to respond to the higher prices and, indeed, the perceived supply deficit by bringing on new capacity.
As The VM Group says, “All in all, we estimate, and assuming no delays, that as much as 0.9 Mt/year of copper production from the ten largest capacity additions could come online in 2012. That translates into mine supply growth of about 5%. Net of attrition and closures, a possible further 0.8 Mt/year of copper production capacity could also come online, meaning that as much as 1.7 Mt/year of new supply could come to market in 2012, or more than 10% above current mine supply. Allowing for supply disruptions, we expect mine supply could in reality grow by 6% in 2012 and 5% in 2013.”
And, while prices could benefit in the short term from hopes that China is coming back into the market, further out, as the VM Group says, “copper’s fundamentals are weakening and we do not see any potential in 2012 for the LME three-month price to challenge February’s record nominal high of $10,160/t. Indeed, we anticipate substantial downside risk to the copper price in 2012, as global demand softens and mine supply – encouraged by the high price – finally responds.”
Author: Geoff Candy
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