Copper is a key manufacturing input, used in everything from electrical wiring to air conditioning units. The copper price has been stable within a range of $7,300-$8,600 per tonne over the past year. Copper prices are down by 8% since the start of 2013 to around $7,550 per tonne, down 25% from the record high in early 2011. As the copper industry's annual gathering in Chile ends we look at what is likely to happen to copper prices over the next few years.
Supply growth could see further delays
Part of the reason behind recent price falls has been the expectation that new copper supplies would come onto the market.
A recent note from Deutsche Bank calls for average global copper supply growth to 2015 to average 6%, even when making an allowance for unexpected mine disruptions. According to the bank the main source of supply growth while be Chile with growth also expected in the U.S. and Peru, as well as emerging mining regions such as Zambia, Brazil and Mongolia.
In contrast CRU are forecasting copper mine supply to rise by 2.5% in 2013, down from 3.5% growth in 2012 (the latter boosted by a recovery in existing output). The current average time delay for projects is estimated at five quarters. However, according to CRU significant additional supplies are now likely to come on-stream after 2015. This additional supply could result in a surplus of 450k tonnes by 2015, that could see prices trend down towards $7,000 per tonne.
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Rising production costs may limit further price falls
Copper is one of the few metals whose price is running well ahead of its cost of production, estimated between $4,000-$5,000 per tonne. This has led some to argue that copper price could fall further.
However, production costs are escalating. According to Colelco, Chile's state owned copper company, production costs rose by 57% in 2012 and are forecast to rise by 36% in 2013 (Chile is responsible for one-third of global copper output).
Rising labour costs (there was a 24 hour work stoppage this week as unions sought higher wages), higher energy prices and regulatory and environmental concerns are all contributing to the increase in costs.
Stocks are near 10-year highs though not as bearish as they first appear
Copper stocks held in LME warehouses are near 10-year highs. According to the US CFTC, speculative positions in copper are currently the most bearish since 2009. According to John Gross, independent consultant “The market generated a surplus in the latter part of 2012. We see excess metal going into inventories and that has been weighing on the price.”
However, care should be taken in drawing too pessimistic a view from LME stocks. First, certain LME warehouses are offering incentives to attract material, so much of the inventory build is due to the shift from invisible to visible stocks. Second, as CRU highlight, global inventories still only represent four weeks consumption.
Goldman Sachs second the concern over stock levels. According to the bank “We do not expect total global inventories to break substantially higher than their 6-7 weeks of consumption until 2014″.
The build in inventories could be starting to slow. LME cancelled warrants, a sign that metal is about to leave warehouses have risen sharply over the past few weeks. This might represent speculative shifts or it might represent an increase in demand / reduced supply.
Demand growth set to slow
Chinese purchases of copper, mainly used in power cables and electrical wire, are set to rise 5% in 2013, compared with 11.7 % in 2012, according to Chile's Mining Minister.
A recovery in Chinese demand over the course of 2013 could add further support to copper prices. Note however that in the short term (Q2 2013) Chinese manufacturing activity tends to see a seasonal slowdown which could weigh on prices (see here). Chinese buying is always a wildcard however. Although outside of normal seasonal purchasing times, Chinese buyers may look to take advantage of the recent drop in prices.
Looking further forward demand from China could continue to slow. According to BHP's CFO “China will aim for more moderated growth. And I think more moderated growth is around the 7 to 8 per cent mark over the next couple of years, trending down to 6 per cent.”
Chinese demand growth for copper could slow at just the time that supply growth increases.
Copper prices likely to see longer term retreat from 2014/15
In the short term there is some uncertainty over Chinese buying. According to CPM Group a bounce back to $8,000 per tonne “would not be outrageous” in the next couple of weeks if Chinese bargain hunt. Equally, watch for a slowdown in Chinese manufacturing growth in the second quarter, which if the pattern of the past five years continues could see copper prices fall.
According to Goldman Sachs “look for copper to move higher into a third-quarter peak…[but] we do not see copper falling sustainably below $7,000 per tonne until 2014”. CRU also see prices around $7,000 per tonne as excess supply weighs on the market from 2015 onwards.
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