COMMODITY NEWS – COPPER
Copper prices finished the week at $1.44/lb ($3,174/tonne) on the LME, declining $0.04/lb
($91/tonne) or (2.8%). Total exchange inventories increased by 7.8% to stand at 114,906
tonnes. In terms of percentages, the greatest increase was seen in Shanghai (+14.8%),
followed by LME (+12.0%) with COMEX unchanged. We would emphasize that
inventories remain critically low. Speculative interest, as indicated by net-long futures
contracts on the COMEX, decreased to 21,628 contracts from 19,033 (-12.0%) in the prior
week, and is well below the 28,052 contracts registered at the end of 2004.
Copper suffered during the week due to a potent combination of a firmer tone in the US
dollar (gaining 91 bp for week on a trade-weighted basis) and rising inventories on the LME
– a long-absent phenomenon in the copper market. While the latter likely reflects little more
than slack business in advance of the Chinese New Year (Feb 9), these factors were more
than enough to spark aggressive speculative unwinding in copper futures.
Recent data points in copper include:
The International Copper Study Group (ICSG, a producers’ group) released new capacity
projections for copper mines, smelters, and refineries from 2004 through 2008. Driven
by historically-high spot prices and continued demand growth, mine capacity is expected
to grow by 3.2 million tonnes (mT) faster than previous estimates of 2.9 mT, or a
compound growth rate of 4.8%. However, 1.13 mT of the 3.2 mT is uncommitted and
still in the exploration and feasibility stage. The market interpretation was clearly
negative, but it should be noted that this growth rate is well below our CAGR estimate
over the same period of 6.6% and CRU’s authoritative 5.5%.
Total smelter capacity growth is 1.4 mT, below expected increases in mine concentrates.
World refining capacity is expected to increase by 2.8 mT with 0.78 mT not yet
committed to construction. Under these projections, copper supply growth appears
limited by smelting and refining capacity. Idle capacity is 0.025 mT for mines, 0.40 mT
for smelters, and 0.54 mT for refineries.
This data supports our thesis that new copper capacity will be slower in coming on-line
than the market expects, and that prices will thus be stronger. While 04/05 growth
appears intimidating at 9.4%, this reflects repairs at Freeport’s massive Grasberg mine
which was off-line for 1H/04 and incremental restarts by Phelps Dodge, BHP and others.
There is very little true greenfield (new mine) capacity that can come on within the next
3 - 5 years due to a decade of underspending on exploration, sweeping industry
consolidation, exit of state-owned loss-leaders, and tougher permitting standards
worldwide. Due to their size and throughput (which can run to +200,000 Tonnes per
day milled and +500,000 TPD ore+waste mined), copper mines require much more
extensive infrastructure than nickel or gold mines. Capital costs frequently run $1.0 -
1.5 billion, and construction takes 2-3 years after all engineering, permits, tax deals, and
financing are in place.
GFMS Metals Consulting indicated that it expects the copper market to make new highs
above $3,000/T ($1.36/lb) soon after the Chinese New Year, but that downside potential
is considerable, targeting a move towards $2,400/T ($1.08/lb) as the year progresses.
GFMS expects Western world refined copper supply to rise by 7.4%, which would reduce
the full-year deficit to 256,000 T, with the market finally moving to surplus in the fourth
quarter. Strong growth in China and higher speculative interest were expected to help
copper set new highs in coming weeks, despite some evidence of slowing demand
growth in the US and Japan. It forecasts an 8% increase in China’s demand to 3.7 mT in
2005, with domestic production seen at 2.3 mT. China is expected to import about 1.5
mT refined copper, up from net imports of 1.076 mT in 2004, when there was
considerable destocking, primarily by the State Reserve Bureau, according to GFMS.
Please see Figure 8 Copper Data Page for updated supply/demand models, as per our
recent global “Supercycle” report. This incorporates supply growth of 9.4% in 2005 and
4.9% in 2006, and consumption growth of 4.8% and 2.4% respectively. This is likely to
lead to a deficit of 13 kT (essentially balanced) in 2005, and surplus of 411 kT in 2006.
Throughout this period, however, inventories will remain critically low, leaving the
market vulnerable to supply shocks or accelerating demand, either of which could propel
prices to new highs. Speculative influences and consumer restocking/destocking
behavior will also be key. |
