This is part one of a two part series. The second piece will appear on Monday.
An interesting (both in terms of the content and the fact it is free!) report by CRU this week explores the current and future situation for the copper market. Of course no discussion of the copper market these days is complete without a discussion of China. And China and copper have become almost synonymous but for those interested in prospects for the metal we would recommend this report as good reading ” even if we don’t agree with all the findings.
For the sake of brevity we will make this into two articles. The first is what we can expect from the copper market this year; the second will be on the future for copper over the coming decades. It was heartening to read that, armed as they are with significant analyst resources, CRU agreed with our predictions earlier this month that copper prices have risen to unsustainable levels. Buoyed by massive SRB purchases, trade and consumer re-stocking and a switch to primary cathode purchases due to poor scrap availability, Chinese demand has single handedly driven the LME copper price up from $3000/ton ($1.36/lb) to $4000/ton ($1.81/lb) since the beginning of the year. As the price fell in 2008, Chinese consumers stopped buying concentrate, canceled or re-negotiated scrap prices even for shipments that had already arrived at Chinese ports, and generally withdrew from the market living off inventories as they (and the rest of us) watched the copper price fall.
By the end of 2008, inventory levels were low. Although consumption was down slightly, it was far from non existent. Consequently, consumers and traders began to buy metal again and the local SHFE price went to a premium over the LME making it more attractive for buyers to import metal. Seeing the arbitrage in prices and hearing reports of physical metal moving to China again, investors read the signs as the Chinese bull market making a comeback. At the same time, the SRB started buying massive quantities of historically cheaply priced physical metal ostensibly to replenish their stocks which had fallen to near zero. However, many read this as the government supporting domestic smelters by creating artificial demand. In hindsight, the former appears to have been the prime motivation.
There are reports of the SRB making direct purchases from overseas producers which would provide no domestic benefit. We held that this view of a dramatic return to strong Chinese demand was a misinterpretation of the facts and in this CRU appear to agree with us. World stocks have continued to rise and CRU is predicting 1.1m tons by year end. With copper at $4000/ton no more mines are being closed and yet demand outside China is set to slump by 19% this year. CRU is predicting a fall back to $2200/ton ($1/lb) once the current buying spree in China blows itself out later in the second quarter. We would be surprised to see it fall that far but we do expect it to come back and would suggest now is not a good time to be fixing any significant volume of forward purchases at current prices.