Where is the Copper Market Headed in 2008?

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Copper consumers must feel giddy from this year’s roller coaster ride. Trying to predict when to buy has been a nightmare. Now we have a new question: What will the red metal do in 2008? The International Copper Group reports that the main engine of demand, China, will become a net exporter of metal in 2008 as new domestic production capacity comes on stream, reversing a significant demand for finished metal to one of additional supply to the world market. Following government efforts to cool the economy with tighter credit controls and the removal of export rebates, demand in China is forecast to rise by between five to seven percent next year, slowing from this year’s breathtaking 12 percent.

Copper inventories on the London Metal Exchange have increased 30 percent since the credit crunch hit the U.S. market in September, with the U.S. housing market showing no end to its 18 month decline. A similar story is unfolding in Europe. Copper demand is forecast to slow in these two important markets. The U.S. consumes 13 percent of world copper while Europe consumes a little less, but combined, they nearly equal China’s 20-30 percent. So if American and European economies continue to slow — and China becomes a net exporter — it won’t even take a recession to further depress copper prices. No wonder analysts are estimating $2.50/lb. for early next year, levels not seen since the beginning of 2007. The message for buyers is to keep price deals of short duration and monitor the markets to buy on dips. Volatility has been a feature of the market for the entire year, and we can expect that to continue in 2008. Most important of all, follow this blog for our thoughts on the market as the newest year unfolds!

–Stuart Burns

Comments (4)

  1. Daniel says:

    I’d be very interested in what you think about the direction of zinc prices–and, if lower, by how much.

  2. admin says:

    We’ll cover the zinc market in the first two weeks of 2008 and that’s a promise!

  3. admin says:

    A large proportion of zinc is used in galvanized steel for which demand could be expected to drop off in North America and Western Europe, both of whose automotive, white goods and construction industries are expected to be in the doldrums for the next 12 months dampening demand.

    China in particular and Asia in general however will not experience the same drop off in demand although they are unlikely to grow at the same level that they have for the last five years. In addition some limited new production capacity is coming online in joint Copper/Zinc mines, in Russia and China.

    All in all therefore I would expect Zinc prices to weaken in 2008, driven by the same fundamentals as Copper but without that metals fund buying interest. – SB

  4. Daniel says:

    Thanks for the thoughts! On the demand side, it appears that the emerging economies need to grow at a decent pace to make up for the decline in demand expected from W.Europe and the US. They don’t need to do great, or as fast as this year, demand just can’t fall off a cliff.

    I’ve been thinking of supply for the zinc market lately–within the context of knowing that a lot of it is FCFC (From China For China) , is higher-cost and with break-even costs that appear to me close to a single greenback.

    With another year of (at least) slow appreciation of the RMB versus the USD, those margins could get squeezed even further. And with the government also wanting to close a lot of the smaller zinc mines, it seems that the possibility for supply forecasts to be higher than expected are reasonable (and this time we’re not reliant on those yearly strikes in S.America!).

    On the other hand, if the emerging economies–especially China–slow significantly in 2008, the supply near term probably won’t matter too much and the bottom could be lower than a filthy yank, possibly 80 cents.

    Anyway, take these thoughts for what they’re worth…just an amateur thinking out loud. I really enjoy the blog!

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