New Highs for Copper Foreseen in Second Half

While copper prices could fall well below $9,000 per tonne in the short term, increasingly tight fundamentals and continuing supply deficits should result in a resumption of an upward trajectory and new peak prices near $11,000 per tonne late this year, a metals consulting firm’s review of the market  has concluded.

United Kingdom-based GFMS Ltd. released the forecast late Tuesday in Santiago, Chile, while launching its Copper Survey 2011, the second edition of planned annual reports on the copper market.

“The sharp improvement in copper fundamentals rekindled investor interest in copper after a period of relative weakness, in the aftermath of the European sovereign debt crisis,” said Nikos Kavalis, GFMS senior analyst, who presented the main findings from the report in Santiago.

GFMS analysts noted that a combination of a tight physical market and strong investment demand had seen prices rise to a series of all-time highs late last year and in the first few weeks of this year with a peak of $10,148 per tonne reached on Feb. 14. Copper for May delivery settled at $9,01.60 per tonne in CME Group trading on Tuesday, up from $9375.15 per tonne at opening.

The analysts noted that continued recovery of mature economies, consumption and strong underlying increases in demand in developing countries, led by China, are expected to result in continued strong global refined consumption of copper this year. Mined production is expected to accelerate and scrap volumes will also rise further but refined production is not likely to outpace demand and the market will remain in deficit this year, they said.

GFMS calculated that the copper market went into deficit in the second half of 2010, more than offsetting a small surplus seen in the first half of the year, they said. Despite an increase in secondary production boosting refined output, analysts said global refined consumption exceeded supply by 286,000 tonnes.

Despite a continuing positive fundamental backdrop, Kavalis said that “in the near-term a noteworthy correction cannot be ruled out.” Analysts noted that sales from unreported inventories of refined copper and scrap have resulted in a well-supplied market in recent months and that negative news influencing copper prices – such as European sovereign debt problems, Chinese monetary policy and geo-political events – also have the potential to result in a major price-cutting liquidation.

Events such as the earthquake and tsunami in Japan are quickly priced into the market, Neil Buxton, GFM managing director told ResourceInvestor.com. “From a fundamental standpoint we tend to view it as a slightly bearish factor,” he said. “We are not expecting a repeat of the swift rebound in industrial activity seen post Kobe in 1995.  The Japanese government is not as well placed to provide monetary and fiscal responses this time around.”

Liquidations could result in consumers moving into the market to replenish inventories, which have been kept at low levels in recent months, and bargain hunting by investors can be expected to emerge, the analysts noted. These two types of buyers are expected to keep the floor for copper prices well above $8,000 per tonne, they said.

GFMS said global mine production growth had slowed to 0.8% in 2010, hampered by falling grades and labor disputes. Total mine output for the year reached 15.9 million tonnes of copper with China posting the largest year-over-year increase in tonnage at 114,000 tonnes. Lower output was tallied in the United State and Peru while other countries reporting increases in production included Zambia, Democratic Republic of Congo and Spain.

Global average cash costs for copper rose by 11.4% in 2010 to an estimated $1.12 per pound or the equivalent of $2,740 per tonne, GFMS said. Analysts said higher input costs related to rising energy and other commodity prices as well as strength in producing country currencies contributed most of the increase, which was also partly offset by higher by-product prices.

Global refined copper production climbed 3.8% to reach 19.1 million tonnes. Total output was boosted by strong increases in secondary production resulting from recyclilng of old equipment and scrap stockpiles being released to the market.

Global copper consumption grew 11.3% in 2010 with offtake totaling 19.4 million tonnes as Chinese growth remained in double digits and consumption in mature economies recovered strongly in the second half of the year, the GFMS analysts said.