Copper, Bubble or Bull? – Part Two

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This is the second of a two part series. You can read the first part here.

On the demand side, Zhang Fengkui, a director at the nonferrous metals department of the Chinese Ministry of Industry and Information Technology is quoted in a recent Reuters report as saying “Based on the development trend in the 12th five-year plan period (2011-2015), copper consumption will be very big,” China’s real consumption of copper may rise to 8.5 million tons by 2015, he said. That would be an increase of 25% from 2010 demand forecasts. State-backed research firm Antaike expects China’s refined copper demand to rise to 7.34 million tons in 2011, from an estimated 6.8 million tons this year.

So faced with sluggish but recovering demand in the west and the probability of continued strong demand from emerging markets are price levels of >$9,000 per ton a fair reflection of the supply constraints we are likely to experience over the next year or two? Copper has risen to just shy of its all time dollar high reached in July 2008 (just before a previous bubble burst, only that one was in debt) but as an illustration of how at least in part this current run is an expression of dollar weakness the copper price is still around 10% below its Euro peak achieved in May 2006. Certainly the physical market is not as active as it was with demand stagnant and physical premiums well below summer highs, reports Standard Bank in a recent note to clients. The bank speculates that recent power constraints enforced by Beijing could be restricting demand and point to rising SHFE inventories as signs that the physical market is actually well supplied. Nevertheless the bank observes that investors are in the driving seat as regards price with massive inflows of funds continuing after the Fed’s decision for further quantitative easing. Coming back to the previous point in dollar terms the price seems high but in euro and many countries currencies the copper price is some way from previous highs. Still Simon Hunt of Brook Hunt frets openly in an article reprinted by MineWeb that copper could be carried along on a wave of speculative euphoria up to $12,000 per ton before it collapses. Hunt’s concern is that we are in the grip of a commodities bubble stimulated by QE, likening the Fed’s actions to a giant Ponzi scheme. He predicts it will all end in tears sometime between 2011 and 2013 (exact peak date unsure) but that by 2016 copper will be back to $1500 per ton. We wouldn’t disagree on the bubble angle, the copper price is being driven far more by investor inflows than end-user demand, but if copper were really to fall to $1500 per ton most of the world’s mines would close. The marginal cost of production is variously estimated around $3500-4500 per ton.

For the time being, the supply side constraints, robust if currently slowing demand and high investor demand for a hedge against inflation if not an outright good bet means copper is likely to continue to be pushed higher. How far, and for how long, remains to be seen; more it seems will depend on the strength of demand than the inelastic supply.

–Stuart Burns

Comment (1)

  1. Constance Kunaka says:

    Interesting and informative point of view. Where does it leave the new copper miners in Africa?

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