Copper prices have been displaying bullish sentiments since the beginning of 2008 as supply side constraints along with weakening of the dollar continue to play upon prices. Copper futures surged further as workers in Codelco called for a strike. This raised concern over supply disruptions from Chile, the world’s largest producer of copper. Copper prices on the LME jumped close to its all-time high after China’s economic growth jumped. China’s first quarter GDP rose 10.6%, increasing speculation that consumption in China will grow and raise demand for commodities in the future. Chinese investment in infrastructure development is driving demand for industrial metals.
As per the latest monthly report from the International Copper Study Group (ICSG), the global market in 2007 indicates an overall deficit of 91 kilo tonnes for the year, compared with a surplus of 238 kilo tonnes in 2006. This followed three years during which the market recorded a cumulative deficit of 1.192 metric tonnes. Although the market began to move into surplus towards the end of 2007 (December recorded a surplus of 100 kilo tonnes according to the ICSG) at the end of the year, stocks remained at perilously low levels.
China, already the world’s biggest copper consumer, is expected to account for the lion’s share of global usage in the long-term, as its economy grows relentlessly and urbanization continues. Chinese copper consumption will continue to increase to 35 per cent (total demand) in the next five years— and 40 per cent in the long-term. China overtook the US as the world’s biggest user of the red metal in 2002. Last year, it accounted for 26 per cent of global copper consumption. Compared with developed countries its per capita consumption is low at 2.8 kilograms, versus 10-20 kilograms. China’s urbanization programme is not even half way through yet, driving the demand for more copper in the future.
Bullish consensus for copper prices emerged, with tight supplies going forward due to labour issues, power and water shortages and growing infrastructure problems. And it is likely that China’s demand would more than offset a slowdown in the US and investment fund buying would remain voracious. Overall, inventories held by major exchanges (LME, Comex, SHFE) have declined by 17 per cent since the start of the year to critically low levels—they are hovering just above the minimum level of the past five years. Due to this tight situation, there is clearly not much room left to cushion any further supply disruptions which would drive inventories even lower. There are also ongoing worries about the possibility of a nationwide, indefinite strike by Peruvian mineworkers from May 12.
The simple fact is that once again copper production has failed to live up to expectations. The ICSG data show that mine output last year rose by a sedate 3.2%, which was well below the pace being forecast at the start of the year. Mine capacity utilization fell to 87.6% in 2007 from 88.3% a year earlier, largely reflecting labour unrest at a number of locations. It is worth noting that during 2001-04, capacity utilization was running at or above 90%. A recent report by Jiangxi Copper estimated that Chinese actual consumption this year will increase by 10-15%. However, the extent to which this will compensate for weakness elsewhere is a moot point. Overall, things look like remaining finely balanced for some time. Fluctuations in metal prices have of course become influenced increasingly by investment activity in commodities generally, but until we see a marked increase in visible stocks, copper appears well supported.
Copper looks poised to break new highs on news of mine supply shortfalls in Chile, further short covering and on the return of Chinese buying activity. LME prices are likely to find strong support at $8200/$8000 levels, whereas resistance is seen at $8880/$9000 levels. A sustained breach above the same shall take prices even higher in coming weeks, towards the $10,000 mark.