This has seen copper trade at a premium to other base metals and be recognised as a good proxy for investors tracking China’s economic growth.
But it’s a different story now. This year copper has declined with other base metals. This can be linked to an improving supply outlook rather than any significant weakness in global demand.
As we look towards 2014, copper prices are expected to fall further as supply increases.
Most of the growth in global consumption this year has come from China in spite of its slowing economy. Demand from the rest of the world has been largely weak, as low demand in Europe and Japan offsets an improving US housing sector.
In China, demand from the construction and infrastructure sectors have been bright spots against a negative backdrop of tightening credit conditions and policy measures aimed at cooling the property market.
Copper-specific indicators show evidence of tightness: Chinese bonded stocks are estimated to have declined by close to 500 kilometric tonnes (KMT) from their peak in February; physical premiums, or the sum paid by consumers in excess of the price set on the London Metals Exchange (LME), remain at high levels; and imports of refined and copper concentrate have increased in the past few months – a typical indicator that China is restocking.
The fall in bonded stocks looks largely to be over with the most recent data seeing a rise of circa 75KMT. The recent rise in physical premiums is primarily a function of the problems created by the LME warehousing rules – which aim to ease logjams in its network of licensed warehouses – more than any real increase in demand.
More specifically, because so much of the copper currently sitting in LME warehouses is tied up in financing deals, consumers are being forced to go directly to the producers to meet their day-to-day requirements, thus driving up premiums.
The recent increase in imports of both refined and copper concentrate is partly due to seasonal restocking and this is not expected to be the start of a sustained cycle.
China has bought copper overseas simply because it has been cheaper than in its domestic market. This arbitrage is now closing, and there should be a corresponding decline in refined copper imports in the coming months.
The rise in copper-concentrate imports has been even more obvious.
This is because lower prices have caused scrap merchants to hoard much of their supply, essentially removing this as a source. It is important to note that Chinese refiners continue to increase the cost to mines for treating the concentrate. This is not typically seen as a bullish indicator of demand.
From a fundamental perspective, the demand outlook is not the reason behind the negative outlook for copper. Chinese consumption can remain resilient and Europe is likely to be less of a drag on global demand.
What is of concern is the wave of new supply from mines that is expected in the next two years. Chile, with six of the world’s top-10 copper mines, is by far the world’s largest copper ore supplier.
Following periods of significant investment many of these projects are being completed. All of this new capacity coming online will likely create sustained surplus for the copper market until at least 2015.
There is a real possibility that the market surplus in both 2013 and 2014 could be even greater than analysts believe. If this becomes the theme that characterises the copper market in the next few years, it will end the supply-side underperformance that has dominated copper pricing for the past decade.
This additional supply will add to global inventories that are already at their highest levels for close to 10 years. Even if the Chinese economy reaccelerated, it is difficult to envisage a scenario where global copper consumption is strong enough to absorb this excess supply.
The final bearish factor that can be added to the mix is that production cutbacks seem unlikely in the medium term because most copper producers are profitable at current prices.
Until copper prices fall to a level that forces production cutbacks, the situation is unlikely to resolve itself.
Joe Murphy is metals analyst at Hermes Commodities
INDUSTRIAL METALS - THE OULOOK
Martin Arnold, director of research at ETF Securities, claims that fears of a ‘hard landing’ in China have been overdone.
“Most industrial metals prices have experienced double-digit losses in 2013, as concerns about a Chinese economic slowdown weighed on the outlook for demand early in the year.
“China’s recent robust economic numbers highlight its voracious appetite for raw materials, which will continue to provide support for industrial metal prices. Recent data indicates that Chinese producers have bought industrials opportunistically, taking advantage of low prices to rebuild stockpiles.
“US and European industrial growth is also improving. While the outlook for the industrial metals sector is strongly tied to the improving global economic outlook, individual metals have significantly different fundamentals.
“Copper and lead are likely to be the outperformers in the near term, while nickel and aluminium are likely to be the laggards.”
