One of my favorite aspects of attending conferences involves the economic forecasts and analysis presented by various speakers. And though we certainly have our own opinions as to the future of the global economy, I really appreciate when a speaker challenges me to think differently. Bart Melek, of BMO Nesbitt Burns shared not only a very upbeat forecast for copper prices (which we too have reported) but shared a rosy picture of the global economy. Melek said his firm appears “atypical from other observers based on a bullish commodity outlook and a bullish global economy with global growth of 4%. He also called for a 10.2% growth rate for some global economies this year and 9.5% next year (we believe he referred to China for those growth statistics). He pointed to the trend of “de-coupling or growth rates becoming more divergent between developing and developed countries. Melek also suggested that commodity markets will, “perform well over the next two years, led by copper which he sited as his “No. 1 metal with the greatest stability and upside.
Melek pointed to several supply and demand factors worth noting. On the demand side, he calls for 7% growth this year and next year, with a 10 year forecast of increased demand of 3.3%. Combined that with an ever decreasing supply stream and one can see how some of have called for $10,000/ton copper prices. Melek predicts only a 13,000 ton global surplus of copper this year with a deficit of 300,000 tons next year. He states that copper, “will be in option price territory beyond the cost curve and it’s happening now. Net long positions are 14,000 contracts and growing. The long run for copper also looks quite positive. He concluded by stating, “copper at this price is sustainable with upside price risk.
How does that feed into scrap flows? One panelist answered by stating, “The mix has changed from retail to more industrial. Overall, industrial scrap production has been decreasing. Supplies are less than they were a few years ago and margins are off too. Different types of copper scrap have found better homes overseas so to speak. One participant asked whether or not one could consider this a long-term trend or an exception. One panelist answered by saying, “Red brass going to China is of a different quality to traditional red brass makers here in the US. We are exporting lesser grades. They don’t have UL standards they can make wire out of bar. Ingot makers are saddled with higher rules for selling in the US. Demand in China increased and they in turn do sell to Africa and the Middle East so that’s why they buy the lower grades of scrap.
Others questioned why more copper projects have not come on stream. Costs certainly play a major role particularly due to lower grades, higher energy costs and higher machinery costs. In addition, with more industry concentration, fewer players can actually get projects started. In essence, the market needs the Rios and BHPs of the world to bring on these sorts of projects. Many of the world’s best assets sit in horrible places politically (e.g. DRC) and investors remain hesitant to invest there. In addition, the risk of a global systemic bank failure still weighs heavily on investors’ minds.
From a price trend perspective we heard a broad range of forecasts as follows:
- Scotia Bank sees $3.35/lb in 2011 with no new mine production
- CS – $10,000 – $4.50 in 2012 based strictly on fundamentals
- BMO has $3.70/lb as its target and concluded that copper has reached the top of its cost curve now; the premium in the market for security of supply explains the tightness