When I saw Simon Hunt was being interviewed by Mineweb’s Geoff Candy, I couldn’t resist checking out the podcast. Simon Hunt has been an active market expert for longer than most people have been out of short pants and there isn’t much in the market he hasn’t seen before.
Candy’s interview ranged across various issues related to copper, the first being the level of real verses apparent copper demand in Asia, an issue Hunt has spoken out on in the past. Having just returned from China, Hunt’s belief that much of the copper consumption in recent years has been for financial investment rather than industrial consumption is proving correct. The acceptance of this general point — that vast sums of money have gone into essentially commodity and stock market speculation rather than capital investment — is even being acknowledged at government level, he said, and one only has to look at inventory flows to realize that the copper market (when financial buying is removed) is in surplus. Whether that is correct is difficult to say, but certainly LME inventory levels have been on the rise as this graph from Kitco shows, suggesting that as Chinese buying has cooled the world has more copper than it can consume:
According to Standard Bank, on-warrant copper stocks in Asian warehouses are now 145,075 tons, the highest they have been in well over a decade. In Hunt’s view, there is a bubble in copper and the bubble is probably going to get bigger before it bursts. You only have to go back to see what happened; last time we had anything approaching this sort of non-industry involvement in copper, he said, like the late 1970s and early 1980s to realize what the outcome will be.
The second topic the pair covered was the likely impact reconstruction will have on copper consumption following the Japanese earthquake and tsunami. Hunt’s position is that expectations around the increase in demand and prices created by reconstruction may be overdone. Firstly, he questions to what extent many of the elderly residents will want to return to coastal locations having lived through one major tsunami. Secondly he rightly points out a huge amount of copper scrap sitting in the waste of devastated towns, which will be a ready source of raw material in preference to imports of refined metal or concentrates. And third, he believes Japan will use the reconstruction as an opportunity to introduce new technologies, possibly with government funding, that won’t be particularly favorable to copper; such as high-temperature super conductors, aluminum wiring in appliances and particularly in air conditioners, the use of aluminum for inner groove tubes rather than copper, and so on. Taken in total, even if each of these factors is only partially realized, the effect in totality could be significantly lower additional copper demand than anticipated.
In conclusion, asked what his opinion was on metal prices over the next two to five years, Hunt said commodities in general will be very volatile over the next two years, but from sometime towards the end of this year until the end of 2012 we are going to see some pretty parabolic rises. Following that, on our economic profile, we are going to have another credit bust and therefore a number of years of deflation and recession and that’s when commodity prices will collapse. Bear in mind what we saw in the early to mid 1980s the voice of experience? Let’s wait and see.