Report predicts deficit but copper prices expected to recover
May 2012 - Economic and political uncertainty clouded the copper market when prices declined in late April. Although growth in the manufacturing industry is slowing in China, the latest Thomson Reuters GFMS Copper Survey 2012, released in April, suggests while current monetary struggles may hinder copper price increases, analysts still predict a stronger second half in 2012.
“Copper prices are still far in excess of the marginal costs of production,” says Neil Buxton, research director, base metals for GFMS, London. “So there remains the incentive for producers to raise output where possible.” According to the report, copper prices rose 17 percent in 2011, leading analysts to predict a weaker first-half forecast for 2012.
Thomson Reuters GFMS predicts a first-half average of $8,305 per metric ton and an annual average 2012 price of $8,475 per metric ton. The slow increase is also due in part to sharply rising Chinese copper imports with the opening two months up a massive 76 percent year-on-year, according to the report. China is building inventories of copper in Chinese-bonded warehouses, suggesting the material has not been used for end-consumption as of yet.
“In the short-term, this can provide some support; however, if this material is not being consumed, it could be returned to the market,” Buxton notes. “Which via low Chinese imports or higher SHFE [Shanghai Future Exchange] stocks, could undermine prices.”
There is continued negative impact on sentiment and consumption because of the ongoing Eurozone crisis, according to the report. China’s swift growth is leveling, also affecting consumption and pricing, said Sanjay Saraf, research director, base metals for Thomson Reuters GFMS, at an event at CESCO Week in Santiago, Chile, launching the copper survey.
The report notes despite economic difficulties in some regions, including Europe, for example, such regions are expected to invest more in copper this year—although prices are not expected to reach prior all-time highs, according to the report. “Investors will invest in copper primarily on their view of the global economy, rather than necessarily specific problems in the Eurozone,” Buxton says. “Therefore we might see investment interest from these regions, particularly if the copper market remains tight in comparison to other industrial commodities.”
Copper demand declined in 2011 as the Eurozone crisis continued and China failed to register double-digit growth for the first time. However, the report notes China’s consumption, while not as high as previous years, is still considerable. The electrical and electronic products sector saw the most growth with a 5 percent gain last year as investment grows for power grid technology in emerging markets.
“Obviously, China is critical as it accounts for close to 40 percent of demand,” he continues. “A number of factors are important this year. Economic growth is slowing—also, two important areas, automotive and construction, are particularly weak at the moment.” Buxton says inventories of both copper cathode and downstream products, including final consumer goods such as air conditioners, have been built so a destocking process could slow demand growth this year. “However, underlying factors such as urbanization and infrastructure expenditure will still support strong demand growth overall,” he adds.
Although copper mine cost analysis shows a 16-percent rise in average production costs in 2011, Buxton says, “The most important factor is the production levels at existing operations.” Existing operations have been affected by “myriad problems,” he adds, noting notably lower grades, strikes and technical problems.
Operating costs also were reported to increase because of inflation rates and increasing capital costs, according to the report. Saraf noted in the report although refined copper output increased by approximately 3 percent in 2011, almost half of that increase was due to secondary production, “highlighting the ongoing challenges facing the primary sector,” Saraf said.
“These seem to be an almost permanent feature of the copper market and partially offset the additions to supply,” Buxton says. “Generally, new mines are taking longer to come onstream than expected.”
Affecting the metalworking and fabrication industries, the relatively tight supply situation should support copper prices, “which will keep margins under pressure at fabricators,” he says. MM