(MBR) - Copper market outlook 8/21/0 10:27 (New York)
August 17 (Metal Bulletin Research) -- Fundamentals support
copper
Over the last two years, copper has been subjected to downside
pressures due to mounting LME stocks and rising production
levels with new projects coming on-stream and cost-reducing SX-
EW production technology. Copper prices started to make
sustained improvements in the second half of 1999 when BHP
announced it was rationalising its North American operations.
This July, announcements of further mine supply disruptions in
the US and worries over output at Grasberg, against a
background of strong consumption and falling LME stockpiles,
have given copper prices a solid fundamental for a further
price recovery. At the start of the month, copper cash quotes
ranged between $1,740-$1,780/tonne. By the end of July,
however, copper cash prices had breached the $1,800/tonne-mark.
In early August, prices maintained the bulk of their recent
gains and on August 9 the official cash quote was $1,847/tonne.
Falling stocks indicates bullish demand
At MBR, we believe that the latest rebound in the copper price
has been justified by underlying fundamentals, as has been
reflected in declining copper inventories. LME copper stocks at
the end of July, totalled 488,000 tonnes compared to around
547,000 tonnes at the start of the month and around 843,000
tonnes in early March - the high point for the year. Further
declines were seen in early August with LME inventories at
465,350 tonnes on August 9. There has been some speculation
that some of these falls, which amount to almost 350,000 tonnes
since stocks peaked in March, are likely to be a relocation of
stocks off-warrant. At MBR, we believe that while a certain
amount of the drawdown in stocks may be due to this kind of
activity, we also believe that the fundamentals point to a
situation of fairly flat refined supply and rising demand.
US demand surging
While there has been signals of a slowdown in the US economy,
there has been little reflection of this in the US semis
sector. According to the latest figures available from the
Copper and Brass Servicentre Association, total shipments of
copper products rose by almost 50% year-on-year in May to
88.15mlb (40,000 tonnes). Brass shipments, meanwhile, were up
21% year-on-year to 156.47mlb (70,900 tonnes). The leap in
semis shipments has been reflected in import figures which have
jumped to meet domestic demand. In the year to May, imports of
copper products have risen 30% year-on-year to 320mlb (145,000
tonnes). While WBMS and ICSG estimates imply that US refined
copper demand has eased during the first half of 2000, at MBR
we believe that any slowdown has been overstated. We do agree,
however, that consumption growth is likely to slow over the
second half of the year, and that US demand will be up by
around 3.2% for the year.
European and Asian consumption healthy
Meanwhile, indicators in Europe continue to point to strong
growth as the economic momentum gathers pace. According to the
latest available BAW statistics, apparent consumption of copper
sheets and strips in Germany rose 10.9% year-on-year during the
first four months of 2000 to 61,950 tonnes. Growth in the wire
sector was even more impressive, however, with apparent
consumption jumping 43.4% year-on-year to 188,504 tonnes over
the same period. With indicators from Europe pointing to
accelerating economic growth, we would expect strong increases
in consumption to continue into the second half of the year.
In Japan, despite the still depressed domestic economic
conditions, shipments of copper semis have risen significantly.
In May, shipments of copper long products were up around 10%
year-on-year to 48,370 tonnes. Brass shipments for the same
month were up 8.6% year-on-year to 41,126 tonnes. In Taiwan,
production of bare wire is up 14.2% for the first four months
of 2000, to around 231,000 tonnes. However, there are signs
that this growth is starting to level-off, with bare wire
production up a more modest 2.6% year-on-year in April to
63,452.
Chinese demand soaring
Meanwhile, demand from China, a net importer of refined copper
- is continuing unabated. During the first half of 2000, net
imports of refined copper were up 45% year-on-year to 274,000
tonnes. The imports come even as official production statistics
have reported a 25% increase in Chinese refined output to
603,000 tonnes in the first six months of 2000. While we
believe that government investment in infrastructure is
fuelling significant increases in Chinese copper consumption,
we do not believe that China was able to consume all of the
additional material supplied to the market in the first half of
this year. Domestic copper prices, which were higher than LME
prices offered trading opportunities, which would have resulted
in significant stock building. Rising Shanghai copper stocks
already point to higher Chinese inventories. Over the remainder
of the year, therefore, we expect Chinese imports of copper to
ease.
While refined production is static.
The latest statistics from the WMBS indicate that refined
copper production was virtually flat year-on-year during the
first five months of the year. Refined copper production is
expected to increase, however, in the second half of the year
due to new capacity coming on-stream from Port Kembla and
Ronnskar. These operations will help reduce the smelting
bottleneck seen in the first half of the year which resulted in
a concentrates surplus.
And mine supply is disrupted
Other factors that will reduce the concentrate surplus include
the suspension of the Continental copper mine in Montana and
continuing problems at Grasberg in Indonesia. Operations at the
Continental mine were suspended in mid-July due to rising power
costs which account for about 30-35% of total operating costs.
The mine had a capacity of 45,000 tpy. There has been no
announcement made regarding the restart of the operation,
however, it is expected to be closed for several months.
Further opportunities ahead
With consumption growth continuing well while refined
production has remained static, we believe that the current
rebound in prices is justified. The reaction to the news that
Falconbridge has declared a partial force majeure on copper
shipments from its Kristiansand refinery highlights the upside
potential at the moment. We believe the steady downtrend in
inventories provides the platform for further rallies which
should challenge the $1,900/tonne mark.
Metal Bulletin Research, London. Tel: +44 (0)20 7827 9977 Fax:
+44 (0)20 7928 6539
-0- (BN ) Aug/21/2000 14:27 GMT |
