Copper Surplus a Tough Call

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Hot on the heels of our previous articles covering the copper market this month we are finding a lot of conflicting data floating around, some of which is bullish for the copper price some of which is not. Earlier this week we covered the SRB purchases, the production surplus for 2008 and Standard Bank’s expected surplus for 2009 to suggest that a combination of SRB purchases, a weakening dollar and shortage of scrap will be supportive for the copper price at current levels.

A recent poll of analysts reported by Reuters has revealed a range of estimates for the refined metal production surplus between 255,000 tons and 1 million tons, with the average of 17 analysts coming out at 324,500, about 100,000 tons above the level we had used earlier this week in our discussion. Adam Rowley at Macquarie Bank commented that European and Japanese demand will most likely be down 20% this year and US demand down about 10%, although with  import figures down 28% it suggests 10% may be conservative. 50% of copper consumption in the US goes into construction and 10% into autos, both of which are down, autos by 30-40%. China’s demand is predicted to be up about 8% before SRB purchases. Again we would question how this figure is arrived at, refined metal imports are certainly up but scrap imports are down and consumption for housing and automotive in China are certainly not growing.

World production was projected at about  20m tons by the ICSG back in October. Since then, capacity has been idled and a more realistic number is now probably closer to 18m tons. If 35% of the global consumption is down to China and Chinese consumption grows at an optimistic 8% that is an additional 500,000 tons. But if consumption in the US and Europe is down 20% that is a demand loss of 1.6m tons, or a net reduction of 1.1m tons assuming no change in South America and the Middle East. The same analyst estimates of output losses through cutbacks, closures, ore grades and so on ranged from 600,000 tons to 2m tons with the average at 870,000 tons. Part of this reduction is accounted for already in our reduction of global output from 20m tons to 18m tons but more capacity may still be idled this year, at least in the west. With estimates of growth, closures and the curve balls thrown by political intervention such as the SRB purchases, you can see how difficult it is to predict both supply and demand in the year ahead.

–Stuart Burns

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