Copper prices take market by surpriseBASE METALS COMMENT
Copper continues to confound
The recent very sharp rise in the copper price appears to have taken the market by surprise.
Author: Lawrence Williams
Posted: Monday , 16 Apr 2007
LONDON -
Towards the end of last year, copper prices seemed to be in a major decline having fallen back from a peak in early May, and a subsequent secondary peak in July from when it was virtually all downhill until early February this year. While the price peaks coincided with periods of labour unrest at major copper operations and subsequent short term supply difficulties in the face of continuing high demand from the rapidly growing Eastern economies, the general consensus of experts in the second half of the year pointed to declining prices for the metal. Indeed many of the major copper producers themselves were anticipating big price falls.
However, since mid-February this year, the copper price has risen inexorably and is now back at $3.57 a pound on the spot market - still some way short of the big peak prices achieved in 2006, but the runup from the February low has been dramatic - close on 50% in 2 months! For a metal where predictions had been for a steady decline in 2007, what has changed the situation?
Firstly, it is apparent that Chinese destocking in the last quarter of 2006 had perhaps a more severe impact on the supply/demand balance than was realised at the time. Secondly, predictions were almost unanimous of a slowdown in the Chinese economy in 2007, coupled with a possible recession in the world's biggest industrial consumer, the USA. What seems to have passed by some experts though, is that even a small slowdown in the Chinese economy means continuing growth near double digit levels, which is way in excess of anything achieved in the major western economies in recent memory.
Coupled with the US economy not falling as far as some had predicted, and necessary restocking in China immediately following the Chinese New Year, and suddenly we are back in a squeeze situation with supply not yet meeting demand.
Now we have reports that China is likely to have to import higher levels of copper scrap this year because of inadequate supplies of copper concentrates from the mines, and the whole supply/demand position looks a long way from that predicted in the second half of last year.
How long the supply/demand imbalance will continue is anyone's guess, but the chances are that this may be for a good few months yet. If the world's major consumer of copper concentrates from the mines continues to grow at anything between 8-10 percent a year, the mines are going to have to battle to keep up with demand. Yes, new production which will increase overall world output, is in the pipeline and perhaps serious labour disruptions at major producers are no longer as much of a threat, but if Chinese consumption continues to remain strong, and other emerging economies continue to grow at a rapid rate, then there could be more price increases to come.
What is the moral of this. Expert observers of the market working for major banks and producers tend to err on the side of caution and naturally tend to be more bearish, or less bullish, on prices than perhaps is justified by real market conditions. Their employers, who pay for their advice, have to take big financial decisions based on their forecasts. So, better to err on the side of caution than to leave their companies heavily exposed. Their findings tend to receive good media coverage and investors follow their advice and markets, and prices, tend to rise and fall accordingly.
But, for markets in general, short of a major collapse in world economies, demand for most metals and minerals is actually going to carry on rising and, in a many cases faster than the mines can increase supply to meet demand. Perhaps the supercycle is still with us after all!
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