Copper Market Can Expect Near-Term Bounce

Category: China | Copper Trading
April 10, 2013 | Comments Off |
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Copper Market Can Expect Near-Term Bounce

Copper Market Can Expect Near-Term Bounce

The mood in the Copper Market appears “guarded” these days as traders take notice of rising global inventories and expectations for mine supply to increase this year.

Three-months copper on the London Metal Exchange hit a low of $7,331.25 per metric ton last week, its weakest level since August. A number of analysts have said they look for a short-term bounce – and as of Tuesday’s settlement copper has upticked nearly $300 from its recent low – yet few if any are looking for a return to the $10,000 area from 2011.

Most observers said they look for any rallies to be limited before more weakness occurs. Yet, nobody is looking for a collapse to the $3,000 region that was hit in the aftermath of the 2008 financial crisis, either.

A number of major investment banks and other firms have issued updated forecasts in recent days in conjunction with a major conference occurring in Chile, the world’s largest copper producer, and the start of a new quarter.

“It is still early in the week, but the mood here at the CESCO conference seems to be somewhat guarded with regard to copper prices,” said Edward Meir, commodities consultant with INTL FCStone. “A majority of the people we have talked to say that we could move somewhat lower over the course of the year, although no one is calling for a substantial decline despite the fact that copper is one of the few metals running well ahead of its cost of production (variously estimated to between $4,000-$5,000/ton). Others are expecting a pick-up in Chinese demand over the second quarter and there seems to be some evidence to support this given a recent uptick in spot orders, but the impact on pricing remains unclear.”

For some time now, the market has known of large inventories of copper in bonded Chinese warehouses. In addition, inventories in warehouses affiliated with the world’s major exchanges are up sharply. As of the end of last week, the combined totals from the London Metal Exchange, Shanghai Futures Exchange and Comex division of the New York Mercantile Exchange stood at 892,084 tons, a jump of 51% from 588,881 at the end of last year, said John Gross, an independent metals-industry consultant. His data show the combined totals for LME and Comex were the most since 2003.

Catherine Virga, director of research with CPM Group, attributed some of the stock rises in exchange warehouses to “attractive incentives” from certain warehouse operators to solicit storage. Also, she and Gross cited increased global supplies above demand, requiring storage.

“The high prices over the last several years have certainly encouraged new production coming on stream,” Gross said. “The market generated a surplus in the latter part of 2012. We see excess metal going into inventories and that has been weighing on the price.”

Virga said 53% of the 2012 increase in global growth of refined copper supplies occurred in the fourth quarter. By contrast, only 10% of the 2012 demand growth occurred in the fourth quarter.

Gross also cited “less-than-robust” economic growth in many parts of the world as a factor contributing to rising inventories.

Copper Could See Near-Term Bounce

Gross said copper technically has looked weaker over the last couple months. Also, he said, the metal put in a series of lower significant highs since its all-time peak in February 2011.

“Having said that, the market is severely oversold and we could see a technical correction (upward) occur at any time here,” Gross said, speaking before the $180 rise that occurred Tuesday.

Virga said the build in copper inventories is showing signs of slowing. Further, LME canceled warrants – seen as a sign that some metal is about ready to leave warehouses – rose sharply in the last couple of weeks. “I don’t expect inventories to continue to rise rapidly,” she said.

For one thing, analysts said, demand tends to be seasonally strongest during the earlier part of the year into spring. This is when much buying occurs ahead of the summer construction season in the Northern Hemisphere. Also, the first quarter tends to be the weakest for growth in mine supply, Virga said.

A wild card is always Chinese buying. The country has a reputation for buying at times of low prices but holding off when prices are high.

“Demand is slowly picking up,” Virga said. “At these low prices, you might see some bargain buying, even from Chinese market participants that might shy away during the traditional seasonal time for (stronger) demand.”

A bounce back to $8,000 a ton “would not be outrageous” in the next couple of weeks, Virga said. “At that level, we’ll see any bargain hunting or buying from China slow down.”

Most Analysts See Retreat In Copper Prices in Longer Term

Virga said she’s a “little bit bearish” on copper for the latter part of the year, especially as a number of new projects come online around the world.

Gross said he looks for future builds in global inventories, adding that this is also a theme for many of the other Base Metals. He suggested that the aggressive monetary easing in many parts of the world, including the U.S., Europe and Japan, played a role in helping copper hold up at current levels. “But the market is now reflecting a reality of excess metal and inventory,” he said.

CPM Group forecast supplies to increase in 2013 by 5.1% for refined copper and by 6% for mine production. Demand growth is forecast to rise by 3.7%, with the consultancy forecasting a 135,000-metric-ton surplus for the year.

UBS, in a quarterly commodities report released Tuesday, suggested copper might draw some support in the second quarter from a waning re-stock by China. Then, however, the bank’s outlook is weighed down by the “persistent” rise expected in global concentrate supply. UBS forecast an average price of $3.35 a pound but looks for this to fall to $2.95 next year (Comex March copper settled Tuesday at $3.4415).

UBS said it anticipates copper demand will rise this year by 4% to 21.4 million metric tons. However, it sees total supply rising by 5% to 21.6 million, leaving a small surplus.

Deutsche Bank, also in a quarterly outlook, said it looks for global supply to rise 5.3% this year to 21.81 million tons while consumption rises 2.1% to 21.59 million.

Deutsche Bank said there are expectations global consumption this year will fall short of expectations. The bank said the cumulative deficit in the copper market over the last decade was 1.5 million metric tons, but it sees a “strong possibility” that this will be eliminated over the next four years as global demand moderates but supply rises.

Much of the supply growth is expected in Chile, which is forecast to top 6 million tons of output this year for the first time ever, Deutsche Bank said. Supply growth is also expected in the U.S. and Peru, as well as emerging mining regions such as Zambia, Brazil and Mongolia. Deutsche Bank analysts said they look for average global supply growth to 2015 to average 6%, even when making an allowance for unexpected mine disruptions.

“Given the longer-term outlook for the copper market and the challenges for
many mining companies in generating returns, we expect that it may become more common for some to look to hedge a portion of their production at these relatively attractive levels,” Deutsche Bank said. “This could in fact lead to relative pressure along the longer-dated tenors even as the spot market weakens.”

Goldman Sachs Cautions That Emphasis On Inventories ‘Overstated’

One investment bank, Goldman Sachs, said the significance of the copper inventory builds may be “overstated.” While “visible” exchange inventories rose this year, analysts said, consumer and producer inventories shrank over the last decade. Also, Goldman said, LME warehouse stocks in the 580,000-ton neighborhood in a current 20.3-million ton market “is not the same amount of stock” on a relative basis as in 2003 when consumption was 15.6 million tons.

The bank said it looks for Copper to move higher into a third-quarter peak.

“We do not expect total global inventories to break substantially higher than their 6-7 weeks of consumption until 2014, and as such, we do not see copper falling sustainably below $7,000/t until 2014,” Goldman said.

Source: Allen Sykora of Kitco News

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