Of all the base metals, copper probably benefited the most from the belief that the China super-cycle would never end. As ore grades deteriorated and labor and equipment problems hit mine production in South America, the Chinese were visibly scrabbling to invest huge sums of money in African mines to guarantee an assured supply of concentrates for their smelters. On the back of rising demand fed by rapid industrialization speculators, both ETF’s and physical traders piled into the market driving the price to nearly $9000 per metric ton (or over $4/lb).
Well we all know what has happened since. The price has crashed, falling $3000/mt in just five weeks during September/October of last year. While producers still have significant stocks, distributors and consumers are at very low stock levels and likely to stay there as prices look like they may drift lower with demand so weak. Now the price is trading around the mid $1.30/lb range having dropped below $1.27/lb just before Christmas. With demand driven by the sectors appearing in the graph below, even the still reasonably robust telecommunication and power transmission part of electrical cannot counter the drastic drop off in demand among all the other sectors.
Courtesy of www.lme.com/copper_industryusage.asp
There have been reports of the Chinese importing considerable quantities in December and January but this is largely a function of the Shanghai Futures Exchange premium over the LME price. For the time being, it is more attractive for Chinese consumers to import than buy domestically. Chinese consumers and merchants have virtually no stocks and those that do have stocks are holding at historically high prices. Word is they intend to sit on those limited stocks in the hope the market will come back up in the future so they can reduce the losses they would face in using them today.
But I hear you say will the much hyped infrastructure projects in the US and China boost copper consumption? No not much is the answer. Such a small part of the US package is destined for infrastructure. Of that, such a small part will require significant volumes of copper that the effect will be small. China’s package is more focused on infrastructure with particular opportunities in massive rail expansion they have planned. But even so, a real uptick in demand will only come when the housing markets in North America, Europe and China begin to recover ” and we can’t see that this year.
Meanwhile, mine closures will continue. Many of the African mines are reported by the ICSG to have a cost of production around $1.50/lb so expect closures there to continue. Capacity has come off in Chile on top of the falling production due to ore grades and other mining problems over the last two years. Russian and Ukrainian producers have canceled all expansion plans. So far the market remains in over supply and prices could again test the mid to high $1.20’s/lb. But with capacity being closed in what was a reasonably tight supply market prior to the current recession it is likely prices will recover strongly in 2010, possibly even in late 2009. Standard Bank is predicting $1.91/lb by the end of 2009 and $2.62/lb by the end of 2010. We are not so sure demand will come back that strongly and would be surprised if prices got beyond the mid $1.40’s/lb by year-end. In the meantime, prices have further to fall and the first half of 2009 will present some good forward buying opportunities for those able to fix prices for any appreciable time frame.
–Stuart Burns & Lisa Reisman