LASVEGAS - The recent copper price rally does not reflect weak demand forindustrial metals and will likely fall before rising again, panellistssaid at the 2009 Institute for Scrap Recycling Industries' (ISRI)convention.
"I think copper's price direction is more down than up. The currentprice of copper does not reflect that we're in the most severe economicrecession and downturn in demand since WWII," said Neil Buxton, managing director at GFMS Metals Consulting in London, describing copper's price recovery as W shaped.
"We are in the middle of the W where there has been a rally and wefind it hard to justify from a fundamental standpoint. Therefore, webelieve the next major move is down," he said.
Chinese influence has been key to short-term copper gains, but analysts believe those supportive factors will not last.
China's State Reserve Bureau was widely thought to be buying copper,with many traders viewing those purchases as an inventory shuffle andthat it would land back in the market.
Buxton disagrees and thinks they were long-term purchases, takingmetal off the market for the next three or four years, but the buyingwill soon end because of the higher price.
A fall in copper inventories and a rise in cancelled warrants -material tagged for delivery - have helped lift prices for the metalmore than 40 percent so far this year. On Thursday, copper was uparound 3 percent.
Daniel Edelstein, copper specialist at the USGeological Survey, agreed SRB copper purchases were unlikely tocontinue with copper's recent price rise. The SRB's purchases wereconsidered an accumulation of opportunity at low prices.
Another key factor behind Chinese buying has been the differentialbetween copper prices on the London Metal Exchange and the ShanghaiFutures Exchange.
DIFFERENTIAL
While some Shanghai premium will always exist to reflect China'shuge imports of refined copper along with its healthy consumptiontrends, Buxton said differential was out of kilter, driven by thetightness of scrap supply.
"It is our view that the differential will decline sufficiently, that the current balance of trade will be diminished," he said.
Edelstein called China "the 500 lb gorilla in the room" after itsdouble-digit growth and 6 percent refined consumption growth last year.Predictions out of Beijing call for 6,5 percent growth in net cathodedemand this year.
But he pointed out that some semi-finished copper products fellsharply last year, indicating a more modest demand growth by China thatshould tame the Shanghai premium.
A recent pick-up in scrap purchases to take advantage of theLME/Shanghai price differential, also lifted the copper price, butBuxton said scrap is more price responsive than any other form ofcopper supply and should slow as prices rise.
Taking China's buying out of the equation, he questioned whethercopper was fundamentally any different than the other industrial metalswith prices between 60 and 80 percent of the marginal cost ofproduction.
Copper stands out with a price that has held above the marginal costof production around $1.50 a lb, leading Buxton to surmise its pricewill drop to adjust to weak demand.
Copper users like semi-fabricators, brass mills, and tube mills showno pick up in demand, with order books at low levels, lead times atminimal levels and margins being squeezed by a relatively high copperprice.
Looking at the top 10 copper consuming countries, only China andIndia are forecast to show positive GDP in 2009. The other 8 represent75 percent of global consumption and are projected to report negativeGDP this year, said Gross.
"That does not correlate with stronger consumption of copper,stronger copper fundamentals or a higher price," said John Gross,publisher of the Copper Journal.
Miners helped by not increasing mine production when copper prices rose in 2008 and again in March and April of 2009.
Longer term, Buxton said some structural issues that drove the bullmarket, like chronic shortages of concentrates, lower ore grades atsome leading mines, metal intensive growth in China and other emergingmarkets, will come back into focus.
"The fact is that there's a metal intensive growth coming from theemerging economies that will emerge in 2010, and that will spark theupside of the W," said Buxton.
Edited by: Reuters