Is the copper bubble about to burst?Is the copper bubble about to burst?
Andrea Niem
12 May 2008
American Metal Market
There is a commodity bubble forming and it's likely to burst,a leading economist told the American Copper Council's annual conference in FortLauderdale.
"And with interest rates as low as the Federal Reserve hasdriven them over the last number of months, the cost of borrowing (forspeculation) is quite a bit lower and it's probably going to investments andcommodities," Harvey Rosenblum, senior vice president of the Federal Reserve Bank of Dallas, said. "And given therun-up (in copper prices), it would not at all surprise me if we were todiscover not very far down the road that some of these prices have gotten aheadof the underlying fundamentals. There is a massive amount of savings out therein the world looking for an outlet, and I think that is one of the things thatis driving this commodities speculation."
However, Rosenblum said that the current high prices allowproducers to cover production costs, and that keeps copper and other commoditiesflowing. Supplies are more likely to be forthcoming if producers are profitable,he said, so investors and speculators are in a way fulfilling a necessary roleto keep liquid markets for the commodities.
The nature of global demand for many commodities has changed,making it hard for people to figure out where prices are going to be in the longrun.
He said one of the markets that many people have not yetfigured out is China. "Is there a bubble forming? Probably. Can the FederalReserve do anything about it? Probably not. You wouldn't like it if we prickedthat bubble in the midst of all the other bubbles that are exploding rightnow."
Catherine Virga, senior base metals analyst at CPM Group, NewYork, said copper prices are expected to remain volatile through 2010 because ofcurrent low bond yields and weak equities coupled with commodities as a veryattractive diversifier. The two factors are balancing each other, creating allthe volatility, she said. Weaker industrial production is being offset by verystrong investment into commodities, supported by the fact that currently thereare no good alternatives for investments.
Virga said her research shows that somewhere around $25billion was invested in commodities in just the first quarter of this yearcompared with $44 billion in all of 2007.
Mining disruptions also will continue to play a role involatile copper prices. In her research, Virga used a 3.5-percent "miningdisruption allowance," which means any lost production beyond this point couldpropel prices higher much faster.
"In 2005, we had disruptions of almost 7 percent of totalmine production; last year, it was about 4.2 percent," Virga said on thesidelines of the conference. "We have tons of excess capacity for smelters.That's the reason why treatment and refining charges are so low. All of thetightness is really in the concentrates." Her forecast for this year is 6.2percent.
Meanwhile, scrap products continue to play a role in fillingthe gap in global refined production, Virga said. "Some of the disruptions weredue to labor (issues). They (the miners) negotiate their mining contracts on athree-year rolling basis. And so we're having problems with the subcontractworkers that didn't negotiate better contracts three years ago, and that'swhat's really going to create more supply disruptions."
Corporacion Nacional del Cobre deChile (Codelco) estimated a 6.8-percent decline in production due tolower ore grades but has not disclosed lost production due to a strike bycontract workers. Virga predicted that copper prices will decline about 8percent in 2009, averaging $3.30 a pound vs. $3.60 in 2008. "If you're not incorporating some reported inventories fromChina, we were in a small deficit in 2007. We're in a very narrow surplus (incopper) in 2008. And in 2009 we're going to be moving into a much more amplesurplus, so it's just not the same supply pressure," she said, but thevolatility will still exist.