October 2008- This year's forecast coverage (see Modern Metals' October 2008 print edition) focuses heavily on the slipping housing market, which is affecting many metals markets--including copper.

According to Oscar Cabrera, vice president and metals and mining analyst for Goldman Sachs, "About 50 percent of copper consumption in the United States comes from construction. Approximately 50 percent of the latter is used in residential construction, so the impact we've seen from the U.S. housing market has been significant. The United States accounts for about 10 percent of the copper consumed in the world. This would be a 2 percent or a 2.5 percent impact to copper consumption from 2007 to 2008."

Cabrera continues, "China accounts for nearly a quarter of the copper consumed in the world. About 50 percent of this copper is being used in power generation. So, the difference between developing economies and the Western World is that the former are developing infrastructure to move their economies from an agricultural base to industrial hubs. While there has been a slowdown in the Western World, this has been offset by demand growth in [the BRIC countries]."

Amir Arif, senior vice president, Friedman, Billings, Ramsey Group Inc., says that slowdowns in the automotive and residential construction industries have "definitely affected copper demand. The numbers are contracting in the United States. They were always shrinking in the United States in the past, but now they're declining at a larger clip than before, and it's just given how much copper gets used in the home--about 400 pounds. When the slowdown started happening, when we saw the initial drop in construction activity, it was a lag effect, meaning we didn't see the slowdown in the metals. That was primarily because people thought it would be a quick recovery, or they were rebuilding inventory. But now that the slowdown's been taking longer and the reality is settling in, I think that's why we're starting to see metal demand down quite a bit on the copper side."

All this uncertainty makes it difficult to make a firm prediction when it comes to the copper market.

"We're the most bullish on copper due to structural constraints in this base metal supply chain, the infrastructure needs from the BRIC economies and the fact that the countries don't have the natural resource endowment to satisfy their demand," says Cabrera.

However, Arif notes that "we're the most bearish about copper. The key reason being copper is trading well above its marginal supply cost of $2.25. It's been trading at a high level primarily because inventories have been low, and there have been a lot of supply disruptions in the marketplace, as well, what with strikes or mines not producing up to expectations. The risk is, though, that as we go forward into 2009, we should start to see new supply finally hitting the market. As we've seen with some of the other metals, even a small change in inventories when you're at a low, critical level can cause a big swing in the price." MM