Surpluses of copper building up in China and elsewhere threaten to push prices even lower
Copper prices, softening for several months, are likely to weaken further in the near-term, crimping the economic prospects of several natural resource-exporting Latin American economies, experts said.
They pointed to a single, overwhelming factor undermining prices of the key metal, used in everything from power cables to white goods: China. Mainland GDP is set to slow this year to 7.5% from 7.8% in 2012. Moreover, Beijing has been heavily stockpiling the metal for the past year, meaning that the ‘natural’ annual replenishment of copper reserves by leading Chinese copper buyers is not happening this year.
“The restocking in China that one might expect at this point in the cycle isn’t as concerted as one might expect,” says Daniel Brebner, head of metals research at Deutsche Bank. “This tells us that growth in demand for the metal in China may be somewhat disappointing and not aligned with overall growth expectations.”
This is galling news for Peru and particularly for Chile, the world’s biggest miner of the metal. China accounts for around 40% of all copper consumption and a tailing off in mainland demand will damage the mining-dominated Pacific economies of Latin America.
This does not appear to be a short-term theme. Analysts in the People’s Republic have been warning for months that China was quietly securing vast reserves of a commodity essential to its economic future. As long ago as last summer, Standard Chartered analyst Judy Zhu was warning of stockpiling. Reserves of copper cathodes in Shanghai’s bonded warehouses alone grew by 20% in the two months to end-August 2012.
Analysts expect that copper prices, which averaged $3.60 a pound in 2012 down from $4 the previous year, will slide further. Last week, they dipped below $3.50 for the first time in three months, 5% down from end-2012 levels.
Deutsche’s Brebner now places a “fair value” on copper at closer to $2.73, while Paul Benjamin, senior copper analyst at London-based energy and metals consultancy Wood Mackenzie sees the market bottoming out at closer to $2.50.
The one bright spot here could, ironically, be the bearish outlook. Sharply falling prices, Benjamin noted, could prompt Chinese buyers to view the metal as a buying opportunity.
Unsold copper is piling up elsewhere. The London Metals Exchange now has 514,000 tonnes of the metal on its books and inventories have doubled in the past three months. “We are facing a copper surplus this year and next year, and potentially the next year as well,” says Deutsche’s Brebner. “The degree of copper scarcity evident in the market over the last ten years seems to be disappearing.”
END.
Short (put) copper --- until the cows come home.imo
CDU Price at posting:
$3.52 Sentiment: None Disclosure: Not Held
