March - April, 2010
Copper Raising the Bar.
In 2008, the lofty copper price took a nosedive, as London copper price fell all the way from US$ 8,890 per ton to US$ 3,000 per ton, down almost 65 percent. In 2009, the price rebounded as copper price in China went up steadily, which is now around US$8,000 per ton.
Copper, the most important base metal is a commodity traded in large volumes all over the world. The global copper market had witnessed a run away boom in 2007 and early 2008 after which it has slowed down. Copper has been at the forefront of the rally in the base metals sector. The cash quote has more than doubled from the low of US$3,051 per ton to a recent high of US$8,000 per ton.
Although prices have slipped by around 5 percent since then, GFMS'(precious metals consultancy firm) latest analysis on the copper market suggests that the downside potential is limited given the underlying fundamentals. On an average annual basis, higher prices are expected each year out to 2012.
Defying the Dollar
In 2009,the dollar remained strong against the yen and other key rivals, but copper took its cue more from the looming strikes as well as the better than expected Chicago PMI. As such, the rebound in dollar had little impact on copper (as well as other industrial metals) on confidence about the bull-run into 2010, thanks mostly to speculative buying.
So far, the red metal has more than doubled this year, leading gains in the Commodity Research Bureau (CRB) Index of 19 raw materials, and climbed almost fourfold in the decade as consumption rose in emerging economies including China and in India.
However, despite the improving global economic backdrop, there is far from a consensus on how copper will fare throughout the next 12 months.
Perplexing
Despite its red hot streak in 2009, copper's continuous rally in the face of swelling inventories, a sign of weak consumption, has perplexed many in the market. Stockpiles and production worldwide are steadily increasing in 2010 alongside copper prices. The latest data showed London Metals Exchange (LME) stocks rose 6,375 tons to above 500,000 tons, their highest level since April last year.
Copper A LA Gold
China's unprecedented US$585 billion infrastructure-focused stimulus package and strategic stockpiling efforts impacted on copper prices. This was evidenced by the 165 percent year-over-year surge of China's imports of refined copper to 2.58 million tonnes in the first nine months of 2009. On that note, the market looked beyond warehouses. Some even said copper was behaving more like gold rather than strictly a base metal. Of course, a number of other factors such as an anticipated global economic revival, new investment cash, index/fund buying, a weaker U.S.dollar, concern over labour disruptions, also contributed to overshadowing indications of the copper inventory build-up.
Copper Currency Standard?
While India is trying to accumulate gold reserves, China is going one step forward by buying up industrial metals on a scale that appears beyond the usual commercial reasons. Some believe Beijing may have made a strategic decision to stockpile metal as an alternative to US treasuries and dollar holdings as it safeguards China's industrial revolution, while the West may one day face a supply crisis.
Speculation of an ultimate “Standard” also swirled when in March, 2009, Zhou Xiaochuan, the governor of People’s Bank of China, reportedly called for a world currency modillion the "Bancor”. The Bancor was to be anchored on 30 commodities – a broader base than the Gold Standard.
Copper “The Red Gold”?
Meanwhile, India’s US$1.2 trillion economy expanded 7.9 percent in the 3rd quarter of 2009, the quickest pace in six quarters. The growth lagged behind only China among the world’s major economies with equally strong demand from auto and power sectors. Copper demand in India is expected to soar by 6 percent in 2010, inline with the GDP growth forecast of 7 percent.
Chindia
India could step up their copper buying efforts as well. Then, currency standard or not, copper could become the ultimate red gold as a strategic asset as well as an inflation hedge.
China expanded to 8.5 percent in 2009, according to the median estimate of economists surveyed by Bloomberg. Urbanisation plus the next industrial revolution led by hybrid cars need plenty of copper.
China plans to boost its annual production of electric or hybrid cars to 500,000 in the next two years, up from 2,100 in 2009. Such a shift will require huge amounts of electrically conductive copper.
Technically Bullish
Copper prices are still off their all-time high of US$8,940 on LME notched in July 2008, before the global economic downturn caused markets to tumble.
Most of the technical signals for copper are very bullish, albeit a bit over-bought on some indicators like RSI& Bollinger Bands. But since the market just put in a new high, it may continue to become more overbought before corrections may occur.
Initial resistance levels set earlier in the year of US$7,500 to US$7,600 have been broken though fears of retracements to US$6,500 and US$5,800 levels remain. But if Western recovery continues to disappoint, or remain mixed, as they currently are, then prices could revert back to between US$5,000 per ton to US$6,000 per ton in 2010 some experts say.
World yet to Recover
The general “recovery trade”, predicated primarily on China and other emerging economies infrastructure and industrial growth, lifted copper to overshoot the underlying fundamentals and somewhat disconnected from reality in 2009.
The continued rising copper stocks suggest demand has yet to recover outside China. As we enter 2010 with China taking an expected copper break, the trend for copper prices will increasingly be determined by the shape of economic recovery in the Organisation of Economic Development (OECD).
The past 12 month has had a variety of reasons that lifted all commodities higher. Copper will unlikely have a repeat performance of 2009. The strength in copper may remain at least in the first quarter of 2010, but after that the market will face a lot of uncertainties regarding the dollar, interest rate, monetary policy, China's copper imports/exports change, and the high inventories as well.
An Economic Precursor
Either as a currency or as a new precious metal, one thing for sure is that copper is a bellwether for the economy because it is mainly used in housing, power generation and other cyclical sectors; therefore, it tends to lead other commodities.
Copper price dynamics over 2010 to 2012 could serve as a precursor to see if Asia can shift its focus from an export-oriented model to one that’s more internal consumer-based, as well as a realistic gauge of the global economy.
Copper Mine production to increase in 2010
Mine production increased slightly to around 15.8 million tonnes in 2009, as increased production in Indonesia and Africa was partially offset by lower production in Canada, Australia and the United States. In Indonesia, mine production was estimated to increase by around 330 000 tonnes.
In Africa, mine production is estimated to increase by around 160 000 tonnes to 1.2 million tonnes, primarily reflecting the start-up of Freeport’s Tenke-Fungurume mine in the Democratic Republic of Congo and Equinox Minerals’ Lumwana mine in Zambia. Offsetting some of this growth was the low production at Vale’s Canadian copper operations following industrial disputes in the third quarter of 2009. Also in North America, production in the United States is estimated to decline by around 6 per cent, primarily reflecting lower output at Phelps Dodge’s Morenci mine and BHP Billiton’s Pinto Valley operation.
In 2010, world mine production is forecast to increase by 2 per cent to 16.2 million tonnes as production in Africa, Chile and Australia increases. In Africa, mine production is forecast to increase to around 1.4 million tonnes, as Vedanta’s Konkola Deep mining project in Zambia which started production and operations in 2009 approach full capacity. In Chile, production is forecast to increase by 6 per cent to around 5.8 million tonnes as the Escondida, Codelco Norte and Candelaria mines return to full production and expansions at Pelambres and Collahuasi are completed.
Australian mine production in 2010 is forecast to increase by 15 per cent as production from Oz Minerals’ Prominent Hill and Newmont’s Boddington gold mine offset lower production from BHP Billiton’s Olympic Dam. Some mines which closed in 2008 as a result of low prices are expected to reopen during the course of 2010. This is also expected to lead to increased world mine production.
Refined production lower in 2009 before increasing in 2010
Refined production of copper is estimated to decline by 1 per cent in 2009 to around 18.3 million tonnes. Weak demand and low profit margins in the European Union and most developed economies have resulted in lower refined primary production in these economies. In addition, secondary refined production of copper declined by around 4 per cent in 2009 as reduced scrap availability in the first half of 2009 limited production.
Helping to offset these production declines was the start-up of Solvent Extraction Electrowinning (SX-EW) operations in Africa and Europe. These include the commissioning of Tenke Fungurume in Africa and Las Cruces in Spain.
In 2010, refined copper production is forecast to increase by 1 per cent to 18.5 million tonnes as both primary and secondary refined copper production increases. Primary refined copper production is forecast to increase by 1 per cent, primarily reflecting increased SX-EW production in Africa and Europe as capacity commissioned in 2009 continues to increase production. An expected increase in the availability of scrap in 2010 is also forecast to lead to increased production of secondary refined copper.
