Copper Predicted to Increase But Who do You Believe?

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Multiple bank reports and analysts comments have come out this week supporting the belief that copper will continue to enjoy robust demand and suggesting the current softening in price reflects a temporary lull ahead of the Chinese October holiday. A Scotiabank report referenced in Mineweb states that due to underinvestment in new production facilities during the last peak, supply will become tight and the bank expects average prices to be around $6,395 per metric ton (US$2.90/lb) in 2010.   Societe Generale states the market will go into deficit in 2010 and predicts copper will sustain a 20% increase on September 2009 prices which would put it around $7000-7200 per metric ton (US$3.20-3.25/lb). This despite a more short term Reuters report reprinted in a different Mineweb article acknowledging short term price easing was again broadly supportive of higher prices.

Most commentators point to robust growth in China, a comparatively tight supply market and the expectation that OECD demand will come back in the 4th quarter 2009 and continue into 2010. The supply market is tight, improvements at some existing mines like Gaby will be offset by losses at Escondida but the market will probably not be adding any net additional production this year. Investments at Freeport McMorran’s Grasberg and Codelco’s Escondida are expected to add maybe 150,000 tons of production next year. To what extent this additional production will alleviate the tightness in the market is debatable. If demand picks up even gradually in the OECD countries it will have a supportive impact but with some 60% of consumption coming from Asia of which half is China its really all eyes east to determine demand growth. Chinese traders, consumers and the States Reserves Bureau (SRB) are apparently well stocked with metal and are reported to be sitting on between 1.2 and 2.0 million tons depending on which source one believes. Certainly Chinese stocks dwarf the 344,000 tons held in LME warehouses around the world, leading some to believe that we have seen the re-stocking of Chinese inventory and that for the next 12 months demand will be, historically speaking, more modest.

We would agree with a price for copper being above $6,000 per ton (US$ 2.72/lb) next year but see the prices likely to remain soft going into the 4th quarter this year. We would be surprised if SocGen’s prediction of prices well over $3/lb held true.   As we have come to know, China is probably the key. If the stimulus packages are continued into the end of this year and early next the demand can probably be maintained but lending has already been reigned back and efforts to boost domestic demand in the absence of exports have the look of short term desperation rather than creating any long term structural change. So if export demand does not pick up, then demand growth is going to be more modest than we have seen so far this year and in view of adequate stocks we don’t see the impetus for strong price rises.

–Stuart Burns

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