SG Commodities Review: Copper

SG Commodities Review: Copper

Robin Bhar
2013.03.20

■ Copper prices have lost their anchor at $8,000/t. Reasons for the sharp fall include weak physical demand, soaring exchange stocks of copper, disappointing data from China, and lack of Chinese buying after the Lunar New Year holidays concluded in mid-February.

■ The cash-3’s spread on the LME copper contract is trading around $30/t, far from a backwardation of $149/t seen during April 2012, suggesting that the global copper market has at worst moved into a surplus or at best is characterised by much better supply availability. The surge in exchange stocks has underpinned this trend.

■ After an estimated 2.5% yoy rise in copper demand in 2012 we expect underlying consumption growth to accelerate to 3% in 2013e as restocking replaces destocking and consumers show more confidence, relying less on hand-to-mouth purchasing behaviour. The headwinds facing the global economy should diminish, and we expect global trade growth to strengthen.

■ China remains the key copper price driver as it consumes some 40% of global copper output. We look for a cyclical recovery over the coming months but with limited upside because of pre-emptive monetary policy normalisation and no significant step-up in investment stimulus. This year’s expected consumption growth rate of 5% yoy may well become the norm compared to the double-digit annual growth rates of the past decade.

■ The supply side remains much less of a wild card as mine supply growth is now accelerating due to restarts, numerous expansions, and greenfield projects. Lower ore grades, technical problems, industrial action, and adverse weather will continue to plague the copper mining industry but overall, higher output should provide more of a cushion against the unexpected.

■ For 2013 we expect the copper market to move into a surplus to the tune of 300,000 tonnes followed by a bigger surplus of 620,000 tonnes next year as supply growth accelerates further. As a result, we now expect the stocks ratio to register 3.8 weeks at the end of the year, rising to 5.1 weeks at the end of 2014 and compared to 3.1 weeks at the end of 2012. We forecast average prices of $7,900/t in 2013, compared to last year’s average of $7,958/t.