GFMS bullish on copper

It is hard to be anything but bullish on copper prices over the long term - GFMS

China stocked, and then de-stocked, copper last year and while there remain downside risks to the price of the metal in the near term, GFMS says, given the fundamentals the long term remains bullish

Author: Rhona O'Connell
Posted:  Thursday , 07 Apr 2011



LONDON - 
There is a possibility of the emergence of negative news for copper consumption in the near future (linked to European sovereign debt, yet more trouble in the Middle east, further tightening of Chinese monetary policy or a series of lower than expected economic indicators for key mature markets), which could produce a significant correction in the price (currently at $9,500/t).  This, though, would generate a floor for prices, which should remain comfortably above $8,000/t.  Copper prices should subsequently resume an upward path, reaching new all-time highs approaching $11,000/t.
This is one of the key conclusions from the recently-published GFMS "Copper Survey 2011".  The research house is expecting copper production to accelerate this year in line with higher prices, but does not believe that it will be able to keep pace with demand, thus keeping the market in deficit at least through to the end of 2011.  The Survey records a residual market deficit of just over 300,000 tonnes in 2010 (just less than one week's refined consumption).  This comprised a gross deficit of 206,000 tonnes, a fall in reported stocks of 60,000 tonnes and an increase in "unreported" stocks of 176,000 tonnes.
The increase in these unreported stocks was concentrated primarily in China and South Korea and follows a 750,000 tonne increase in unreported stocks in 2009.  GFMS notes that the majority of the stock increase in China took place in the first months of last year, when there were arbitrage opportunities between local and international prices.  GFMS information suggests that there was destocking later in the year, especially in the last quarter; some of this was the mobilisation of physical investor positions, while much of the balance came from fabricators using inventory.  Some mobilisation is likely to have come about as a result of tightening credit and the need to generate cash.  Physical premia thus fell in China towards the end of the year, although the tightness in the market elsewhere in the world meant that international copper prices continued to rise, while local Chinese prices moved to a discount to the LME.
Global consumption increased by 11% or just under 2M tonnes over 2009 to 19.4M tonnes.  Almost 600,000 tonnes of this growth came from the mature economies, while the BRIC nations contributed a gain of 1.1M tonnes, much of which, of course, was in China.  The year 2009 was one of depressed demand in the mature economies, however and demand in these nations in 2010 did not regain the levels of any of the years 2006-2008 falling short of 2008 demand by more than 700,000 tonnes.  The rapid growth in demand in the BRIC nations, and the fact that 2009 demand in the Asian Tigers was barely below that of 2008, meant that the global fall in demand in 2009 was relatively shallow; global demand in 2010 was 4.2M tonnes higher than in 2000, an annual average growth rate of 2.5%.
Total reported inventories of copper stood at end-2010 at 1.28M tonnes, a fall of 160,000 tonnes or 11% from 2009, but substantially higher than the average level over 2004-2008.  The bulk of these stocks, which equated to just less than 3-1/2 weeks' global refined demand, were in the hands of producers and the Exchanges.
The Survey, which goes into immense detail of the copper industry all across the supply and demand chains, identifies electrical and electronic products as the largest consumer of copper, with 38% market share last year, ahead of a 31% share for building construction.  Transport, and Consumer & General Products took up 11% each, with the balance in Industrial Machinery & Equipment.  The Survey comments that the general improvement in demand was encouraging given the economic uncertainties that continued to cloud the market.  Among mature economies as a whole, the construction sector was the only area that failed to register a double-digit rebound last year; these improvements in the other sectors reflected continued government stimuli in some areas, the release of pent-up demand and strengthening export demand, although overall offtake in these sectors in the mature economies remained below historical peak levels.
The continued improvements in the BRIC nations meant that their market share increased to more than 45% of total last year, compared with only 16% in 1990.  GFMS expects this trend to continue in the years to come, reflecting the continued shift of copper-product manufacturing towards China and other developing economies.  China accounted for 37% of global copper demand in 2010, reflecting the nation's rapid economic growth, much of which revolved around copper-intensive end-uses.  Copper consumption in the mature economies, by contrast, has been falling at an annual rate of more than 3% over the past decade, reflecting the fact that infrastructure and urbanisation processes are now largely complete in these economies, along with the shift in the manufacturing sector towards low-cost areas.  This has been exacerbated by miniaturisation and technological advances that have impeded copper consumption in the mature economies.  Copper's intensity of use, for example (expressed as tonnes of copper consumption per million dollars of GDP), has grown from 0.41 in 1990 in China to 0.79 last year; while in Brazil it has also doubled from 0.12 to 0.23.  In the United States it more than halved from 0.27 to 0.13.
GFMS takes a generally positive short and medium-term view for the metal's fundamentals, with the rebound in demand expected to continue for much of the year.  Primary producers are responding to higher prices; secondary production was up by 19% last year and continues to increase this year.  GFMS believes though that much of the improvement in the market's fundamentals have been discounted by prior investor activity and this, along with a speculative overhang, does mean that there are near-term downside risks to the price.  For the longer term, however, "it is hard to be anything but bullish for copper prices".

GFMS bullish on copper - MINEWEB


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