Citicorp produced an extremely bullish report this week predicting that copper prices would be sharply higher in 2009 and 2010. Specifically they forecast copper to rise to $5lb by the end of 2008 and $5.50lb by the end of 2010. The reasons given were a tight concentrates market, slower supply growth than had originally been predicted and ongoing robust infrastructure investment in China.
According to the article reported in MineWeb the supply market has not grown as fast as anticipated – particularly expansion at existing mines due to a number of issues not least of which a world shortage of sulphuric acid. Mine expansion has been hampered by power problems, both a shortage of power as in Zambia and the rising cost of energy as in Chile, source of 35% of the world’s copper.
We would not question any of this but the demand side is what raises eyebrows at MetalMiner. Citicorp is predicting Chinese copper demand will increase at a trend rate of 15% a year due to massive infrastructure projects planned for over the next 2-3 years. Specifically they mention:
- The rail network is scheduled to double in size
- Expressways are set to increase by 75%
- Rural roads will be expanded by 66%
- Airports will build out by 70%
- And seaport capacity
is expected to increase by 280%
The theory goes that as the world economy cools the Chinese government will look to maintain domestic growth by boosting investment in fixed assets. Though we would not argue that the Chinese will seek to use domestic fixed asset investment to offset any dramatic drop in exports we would counter that infrastructure investment is already running at a high level and the government’s over-riding consideration in the short term is to control investment and to cool domestic (admittedly private) investment.
Citicorp estimates that the cost of copper production is approaching $ 0.80/lb so there are not exactly driving cost pressures pushing up the price. It was interesting to note this week when an aluminum smelter owned by Chalco in Shanxi province was forced to stop production due to power shortages the LME aluminum price jumped nearly 5% in one day. Likewise zinc and lead rallied 3.4% and nearly 4% on the same news. Copper however fell 0.7% suggesting that speculators do not see a shortage of copper as a major concern anytime soon.