Copper Overdue for a Price Correction

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A combination of strike action at Xstrata’s Lomas Bayas copper mine in Chile and expectations of another month of record imports in April, following March figures has helped push copper to a 70% gain since the lows of December 2008. Xstrata’s workers are seeing a tight supplies market and rising prices as the impetus to push for higher wages. It would seem the market does not need much encouraging as LME stocks have fallen 150,000 tons or nearly 30% in the last 3 months according to the LME.

Although scrap imports into China have jumped 50% in March the market remains fundamentally weak in terms of availability and in the face of mine production shortfalls, is likely to keep the supply market tight. According to Standard Bank, Escondida first quarter production figures were 45% down year over year at 156,400 metric tons due to equipment failures and the continuing problem of falling ore grades.

While China’s SRB has continued to take delivery of booked orders there have been no more announcements of further purchases. So unless they are doing it surreptitiously, it suggests the SRB believe, as we do, that prices are due for a correction and they may be better placed in at mid year to come back into the market. Copper is fundamentally quite strong with steady demand, helped by the SRB, and a tight supply market. Even US purchases may begin to pick up slightly if house starts show signs of a mild recovery, although European and Japanese demand is expected to remain weak into 2010. However, the rise in prices over this year has exceeded most analysts’ expectations and the general consensus appears to be a drop back and period of consolidation is due over the summer before inflationary pressures add further momentum in the 4th quarter.

–Stuart Burns

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