Copper prices to drop as fundamentals weaken: analysis
Source: Hoovers
Copper is set to become a buyer's market as global consumption slows and production rises, analyst Simon Hunt of independent metals consultancy Simon Hunt Strategic Services said Thursday.
"What is now a seller's market will become a buyer's," Hunt said. "We don't want to make specific price forecasts because prices are now a function of credit markets rather than industry fundamentals, but we remain convinced that when the credit cycle changes from benign to adverse, as it surely will, copper prices will end up by being below $2,000 a metric ton."
London Metal Exchange copper is currently trading at around $7,850/ton.
"Prices have nothing to do with real fundamentals," Hunt said. "Copper, like other base metals, is being used as another money instrument.
"Stock movements are being manipulated by experienced traders in institutions with deep pockets in association with other parties. These games have always been played throughout copper's modern history – and probably before – but never on the scale being seen now," Hunt added.
This scenario has been made possible by the drive to find alternative investments to bonds and to equities, Hunt noted. But with a decline in the global equity markets and the potential "weaken significantly over the summer and beyond."
"The trouble is that the longs have very deep pockets and very long positions to defend," Hunt said. "All that we can say is that volatility will increase and that the longer these long positions, which can only grow, are defended the greater will be the eventual fall," he added.
Substitution is already taking its toll on global copper consumption, Hunt said, with China having lost around 250,000 tons last year.
"Globally we guess that 400,000 to 500,000 tons was lost last year. These losses will only rise, especially if copper prices remain at these exalted levels," Hunt added.
Hunt noted a significant part of China's growth in copper consumption "is no more than the replacement of consumption that used to be in North America, western Europe and Japan." He also said high copper prices "not only bring scrap out of the woodwork but mills are encouraged to use more of it.
"Putting these developments together should mean that world refined consumption will slow to a growth of only 0.9% this year, rise to 4% in 2008 and then basically remain flat until 2013," Hunt said.
"The headwinds of slowing global economic growth, substitution, trend consumption in regions accounting for 42% of world copper consumption being in secular decline and the increasing use of scrap with prices at these high levels will ensure, sooner or later, that the efforts to manipulate prices will eventually fail," he added. |
