Is Copper on the Rebound?

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What’s going on with copper at the moment? On the one hand we read copper may fall to $3000/metric ton in the second quarter according to Dan Smith, an analyst at Standard Chartered in London. Dan goes on to say it will average just $3135/metric ton in the third quarter as global copper demand contracts a further 4%. Goldman Sachs joins them in reducing their predictions for both price and demand in a recent report.

Yet at the same time, producers (yes they would wouldn’t they) are pointing to a tight stock situation among consumers as evidence that even a small up tick in demand will boost prices. Norddeutsche Affinerie was quoted by Reuters as saying they expected prices to rise within months due to the various stimulus packages being announced. As if to support their case, the LME has surged this week as stocks have been withdrawn first in Asia and then in Europe. The belief is the European LME warrant (a 25 ton lot which is held in an LME warehouse by the exchange and physical delivery can be taken or re-sold via the LME to another buyer) material was destined for China on the basis that European material commands an LME price level, with perhaps a $10/ton discount whereas Singapore commands a $110/ton premium. With current low freight rates it is more economical to ship European material than take delivery in Asia. Supporters point to this activity and some physical buying as the beginnings of a resurgent Chinese demand which will be further fueled by the stimulus package expected to add an additional 6.2% to copper demand according to BNP Paribas. But China’s own copper industry disagrees. Wang Chiwei, a deputy manager of China’s top copper producer Jiangxi Copper Group expects copper consumption to grow by just 2% this year. Reports this week also point to rising Japanese exports of refined copper to China, with exports in January of 47,000 tons, topping the all time high set in 1974.

However look a little closer and all is not quite as these observers would have us believe. In fact China is finding it increasingly difficult to secure competitively priced scrap. With the low copper price, scrap is not coming as easily from either secondary sources (reclamation) or the primary market (semi producers production waste). Consequently, smelters are increasing purchases of more expensive blister (a concentrate of copper ore, usually about 98% or so copper content that the smelters buy to refine into electrolytic 99.99% copper cathodes or wire bar) while traders and consumers are switching to cheaper imports instead of buying domestically. Though the SRB (State Reserve Bureau, China’s government body responsible for their strategic reserve and serves as a proxy for managing domestic supply and demand) continues to buy high priced domestic material they will support the SHFE premium that is boosting imports of refined metal. If the SHFE price were allowed to fall closer to the global price, domestic consumers would switch back to local smelters of blister. Some observers are even skeptical as to how much of these purchases are actually being consumed and how much are traders positioning speculative stocks. Japanese producers appear to agree with us, they are maintaining planned cuts of 10% in capacity during the first and into the second quarter because they do not believe the Chinese demand will continue.

So is the current enthusiasm justified? Capacity has certainly been cut world wide, both at the mining level and increasingly among smelters. The market is closer to balance than is the case for many other metals like aluminum and zinc, but there is still 500,000 tons of inventory in LME warehouses, the highest since 2003. Meanwhile, demand continues for the most part to soften. Copper’s principal applications ” construction and autos ” are continuing to contract with little sign of an early turnaround. Our expectation is prices will fall back from the current $1.57/lb level closer to the last two month mean of about $1.47/lb, at least for this month. Further weakness into the second quarter cannot be ruled out.

–Stuart Burns

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