A look into the future: copper

By late June the spot price of copper had come off its recent high, falling by about seven per cent from a peak of US$5354 per tonne. Analysts at Macquarie Bank said the metal had experienced a “phenomenal run” with prices lifting by as much as 80 per cent since late last year.
There were rumours that China’s State Reserves Bureau (SRB) was selling part of its recently acquired copper inventory back into the market. Macquarie said the SRB was believed to have bought around 300,000 tonnes of refined copper since the beginning of 2009.
The main theme in the copper market has been the battle between tight supply and the weak demand environment, reliant on Chinese demand for its short-term gains. Despite recent talk of “green sprouts”, particularly in China, demand remains weak across all the key markets for copper.
During the last calendar year the copper price averaged $6,951 per tonne according to the Australian Commodities (March quarter 09) report from the Australian Bureau of Agricultural & Resource Economics (ABARE).
Movements in the copper price were volatile in 2008 with prices increasing to nearly $9,000 a tonne in July before falling more than 65 per cent to finish the year trading below $3,000 a tonne.
Prices for the metal will probably experience similar volatility this year with Macquarie suggesting that prices could fall below $4,400 per tonne in the near term.
Goldman Sachs’ 12-month copper price target has been set at $4,800 per tonne; and it has targeted a price of $5,800 per tonne by the end of 2010.
According to ABARE the copper price is forecast to average significantly lower in 2009 as global copper consumption contracts for the first time in three years. Accompanying this contraction, world refined production is also expected to fall as mine production cuts caused by both technical constraints (low ore grades and equipment failure) and sharply lower prices limits growth.
ABARE forecasts that copper stocks will increase to 3.2 weeks of consumption in 2009, supporting an average copper price of $3,330 a tonne.
In 2010, the copper price is widely projected to average higher as global consumption begins to increase in line with an assumed improvement in world economic growth, said the ABARE report. This trend is likely to continue until 2012 when prices in real terms (in 2009 dollars) are projected to peak at around $5,300 a tonne. For the remainder of ABARE’s outlook period (2013-14), prices are expected to gradually ease as strong growth in mine supply results in increased stocks. The copper price is projected to end the outlook period trading around $4,300 a tonne (in 2009 dollars).
Metals consultancy GFMS said, as conditions improve on the demand side and with production growth being limited, the strong longer-term fundamentals of the market are likely to attract some fresh investor interest in copper, which would maintain healthy price levels.
“Looking further ahead, conditions improve materially in 2010,” GFMS reported in its recent copper study. “Although mine (and by implication refined) production overcomes many of the issues and grows by a healthy 5.8 per cent, consumption growth is far stronger, as a result of re-stocking in the semi-fabricated products segment of the market, following the de-stocking of the bear market.
“Although the market remains in surplus, this collapses to 170,000 tonnes and prices eventually establish themselves above the $5,000/tonne mark on a sustainable basis, averaging $4,700/tonne over the year.”
GFMS said that it sees copper demand finally exceeding supply in 2011 and 2012, as growth in copper cathode production fails to match healthy increases in demand, which are once again primarily fuelled by Chinese consumption growth.
ABARE says economic growth in key copper consuming nations such as China, the United States, Japan and Germany will be a key factor influencing movements in the copper price over the medium term. However, there is also considerable uncertainty surrounding the outlook for mine production.
“A major risk factor is associated with the degree to which current credit constraints limit existing and future mine developments. If access to credit continues to remain constrained in an extended period, it would have the potential to adversely affect mine production over the next several years,” said ABARE’s Australian Commodities March report.

To view a copy of ABARE’s copper outlook click here
To read "A look into the future: iron ore" click here
To read "A look into the future: coal" click here

To read the second part of this report click here.