Analysis: Copper stands its ground in markets mayhem
reuters.com
By Susan Thomas
LONDON | Tue Aug 23, 2011 8:12am EDT
(Reuters) - Robust Asian demand and a threat to supplies will keep copper price falls relatively modest over the next six months, regardless of the volatility that has whipped global financial markets on rising fears of a recession in Western nations.
The MSCI world equity index has fallen around 19 percent since early May and U.S. crude oil about 25 percent, while copper has lost around 10 percent.
"Given all sorts of factors; the downgrading of the U.S. credit rating, the problems in the euro zone, you would have thought copper would be 20 to 30 percent lower. It's been an impressive performance," Credit Agricole analyst Robin Bhar said.
"Maybe metals are looking beyond the short term where fundamentals are more concrete, maybe looking east, because copper is not beholden to the United States and Europe, it's beholden to the developing world."
The global copper market is expected to be in a deficit this year, although analysts in a Reuters poll last month trimmed their predictions of the shortfall in light of the deteriorating global economic outlook.
The average of 24 forecasts showed the copper market would have a deficit of 343,150 tonnes this year, down from a 444,000 tonnes deficit forecast in January.
China, the world's largest copper buyer, consumes around 19 million tonnes annually and is the main driver of demand. Its demand growth for the metal, used in building construction, wiring and power cables, rose just 2 percent in the first half of this year compared with the same time last year.
"So there's already been a substantial shortfall in the contribution that China has made (to demand growth), yet the market remains tight," said Duncan Hobbs, senior commodities and mining analyst at Macquarie Securities Group.
"So the key takeaway from that is probably (that) the balance of risks in terms of China's contribution to copper demand growth through the second half of the year is to the upside."
The latest data suggest that although the pace of economic growth in the world's second-largest economy is cooling slightly, it is still expanding robustly. Exports hit record levels in July as factory output grew 14 percent from a year ago.
China's imports of refined copper rose almost 9 percent to a six-month high last month as factories took advantage of lower prices and the country embarks on building millions of homes.
The arbitrage -- a lower three-month London Metal Exchange copper price than the most active Shanghai copper contract price -- opened early this month and will suck in more metal.
At the same time, inventories of the metal in warehouses monitored by the Shanghai Futures Exchange fell more than 7 percent in the week to last Friday.
"It is surprising to me how resilient copper has been, especially when investors took their money out a few months ago," a source at a top mining company said. "I suspect everyone is still worried about lack of new supply."
SUPPLY
Miners in Chile, which produces a third of the world's mined stocks, are struggling to maintain production after being hit by multiple labor disputes and bouts of poor weather this year, along with diminishing output at older mines.
Antofagasta on Tuesday pointed to nearly nil growth in production during the first half because of disruptions.
Workers at the world's biggest copper mine, BHP Billiton's Escondida, held a two-week strike that ended this month, and the union at third-largest Collahuasi have threatened to stage a one-day stoppage next month.
"The tight supply situation either caused by the strike at Escondida or other supply disruptions will keep (copper) prices at a fairly high level," Chris de Lavigne, vice president at research firm Frost & Sullivan, told Reuters recently.
Macquarie says data for the first half shows Chilean copper mine output at about 70,000-80,000 tonnes below what the bank had expected. If that's repeated in the second half of this year, it would leave Chile off by about 150,000 tonnes.
"That might not sound like a lot, but in a market that is already looking at a cumulative deficit of 600,000 tonnes over the next two years, if you lose 150,000 tonnes of mine output in Chile, then that's another 150,000 tonne deficit in the copper market," Hobbs said. "There is no where else that can be made up."
Morgan Stanley last week cut its global economic forecast for this year and next, saying the United States and euro zone were dangerously close to a recession.
Most economists say they are not cutting their growth forecasts for emerging Asia for now, as the continent is less dependent on exports to Western markets than it was when the financial crisis hit in 2008.
But if Europe and the United States do tip into recession, it will ultimately have an impact on sentiment and prices.
"Although the U.S. in terms of copper consumption may be only 10 percent, compared to China's 40 percent, in terms of sentiment it's probably 40 percent rather than 10 percent," Bhar said. "That's what you've got to deal with in the short term."
(Additional reporting by Melanie Burton, editing by Jane Baird) |
