Copper Stockpiles Slumping Makes Metal a Favorite for Goldman
By Chanyaporn Chanjaroen - Dec 6, 2010
Thebiggestslumpin copper inventories in six years is compoundingshortages aspriceshead toward record highs, making the metal a toppick for GoldmanSachsGroup Inc. and Morgan Stanley.
Demand willoutpace supplyby367,500 metric tons next year, enough for wires,pipes and appliancesinabout 1.8 million U.S. homes, according to themedian forecast of12analysts surveyed by Bloomberg. Stockpiles maydrop to an all-time lowofless than one week’s usage, said Michael Widmer,aLondon-basedmetals analyst at Bank of America Merrill Lynch.Globalexchangeinventories have dropped 22 percent this year, headingfor thelargestslide since 2004, data compiled by Bloomberg show.
Pricesadvanced34percent since June 30 even as the International MonetaryFundpredictedslower world growth, U.S. unemployment stuck near itshighestlevel inmore than a quarter century and China,whichuses twoin every five tons of copper, curbed lending and raisedinterestrates.Now, banks from Credit Suisse Group to Barclays Capitalarepredictinghigher prices, with the median in the Bloomberg survey atarecordaverage of $8,542 a ton for 2011, 15 percent more than this year.
“Copper is the most attractive” of the base metals, said Ian Henderson,who manages about $8 billion in assetsatJPMorgan Chase & Co. inLondon, including shares of Freeport-McMoRanCopper & Gold Inc. andBHP Billiton Ltd., the secondandthird-biggest miners. “I don’t expectany decline in copper demandin2011 and there is little in the way ofnew mines coming on stream.”
Smart Phones
Pricesclimbed18percent this year, reaching $8,725 a ton on the LondonMetalExchangetoday. That compares with a 6.5 percent advance in theMSCIWorld Indexof equities, a 6.9 percent return on Treasuries and a16percent gainfor the Standard & Poor’s GSCI Index of 24raw-materialfutures.Prices reached a record $8,966 a ton on Nov. 11.
Demandforthemetal, used in everything from smart phones to brake pads,willincrease4.2 percent next year, compared with a 2.6 percent gain in production,BarclaysCapitalsaid in a report Nov. 11. Supplies fell 363,000 tonsshort ofdemand inthe first eight months of this year, theLisbon-basedInternational CopperStudy Group said in a report Nov. 23.
Miningcompanieshave failedto keep pace with demand because new reserves aregettingharder to findand the quality of ore is declining, meaningless metal isextracted fromeach ton of earth. Average grades declinedto about 1.1percent this yearfrom 1.6 percent in 1990, according toGuildford,England- basedresearcher Brook Hunt, a Wood Mackenziecompany.
Biggest Mine
ProductionatEscondida, the world’slargest copper mine, will drop as much as10percent in the 12 monthsending in June because of lowergrades,Melbourne-based BHP Billiton,the largest shareholder, said inastatement Aug. 25.
Freeport-McMoRan,the largest listedproducer,said Oct. 21 that its copper sales fromNorth America would dropto 1.1billion pounds this year from 1.2billion pounds in 2009. SalesfromIndonesia will probably decline to1.2 billion pounds from 1.4billion,the Phoenix-based company said.
“The major copper reserves that are being produced today come from 100 year-old mines, with few exceptions,” Freeport Chairman James R. Moffett said in a conference call on Nov. 17.
Analysts’forecastsforshortages may not yet be reflected in futures markets.Copperfordelivery in December 2011 traded at $8,555 on Dec. 3 on theLME,1.9percent below than the benchmark contract for delivery inthreemonths.
Goldmanpredicts prices of $11,000 by then andbuyingthe December 2011 contractis one of its seven recommendationsincommodities, according to areport Dec. 1.
Banking Bailout
Theforecastgains could bestunted by slowing growth. Prices slumped 7.7percent inthree days lastmonth on concern China’s steps to controlinflation maycurb demand formetals and that Ireland would need abanking bailout.
Pricesnowmay also be skewed by who owns metal.One unidentified company held50percent to 79 percent of the LME’sdeliverable stockpiles as of Dec.1,bourse data show. Buyers that daypaid the largest premium in twoyearsfor immediate supply, relative tothe three-month contract.Deliverableinventories total 324,375 tons,the exchange said Dec. 6.
Recordpricescould encourage users tosubstitute cheaper materials. Globalconsumptionmay be 100,000 tonsless than expected in 2011, and 250,000tons belowpredictions in 2012,because of replacement by plastics inplumbing andaluminum alloys inair-conditioners, Credit Suisse said Oct.20.
Hybrid Cars
Substitutionmaytake out 3 percent ofdemand this year and next, accordingtoLondon-based Rio Tinto Group. Newuses in electric and hybridcarsshould make up for some of that, Andrew Harding,chiefexecutive officer of Rio’s copper business,said Nov. 26. TheaverageNorth American car contains about 23 kilograms(51 pounds),while anelectric car uses about 75 kilograms, he said.
Thetriplingofprices since December 2008 is also spurring use ofscrapmetal,alleviating shortages signaled by this year’s 22 percentdropinstockpiles monitored by exchanges in London, Shanghai and NewYork.Thesupply of metal from wires and electronic goods jumped 25percent inthefirst eight months, the International Copper Study GroupreportedinNovember.
The biggest threats to higher pricesareChinatightening its monetary policy and a worsening Europeandebtcrisis,said Bank of America Merrill Lynch’s Widmer, whoseMarchprediction forthis year’s average price is accurate to within 2percent.
China Economy
China may raise bank reserve requirements to counter capital inflows and a possible jump in lending at the start of 2011, Li Daokui,anadviserto the central bank, said Dec. 3. The bank pushed theone-yearlendingrate to 5.56 percent in October, the first increasesince 2007.
Still,manufacturinggrew at a faster pace for afourth straight month inNovember, accordingto the nation’s logisticsfederation. China’s economywill expand 9percent in 2011, compared with10 percent this year,according to themedian of 18 economists surveyedby Bloomberg. Thatwould still be morethan three times the speed ofthe U.S., thesecond-biggest copper user, the survey shows.
ConsumptioninChina,India, Brazil and the Middle East will expand at anaverageannual rateof 7 percent per capita through 2015, according toBarclaysCapital.
“Where is all the new copper going to come from?” said Tom Patton, chief executive officer of Quaterra Resources Inc., a Vancouver-based company developing mines in North America. “New deposits take 10 to 15 years to start up.”
Higher Demand
Aurubis AG, Europe’s largest smelter, is also predicting higher demand next year.
“We presently see a very positive order flow for next year,” Bernd Drouven,chiefexecutiveofficer of the Hamburg- based company, said by e-mail.“Everycopperprice dip is recognized by customers as an opportunity forneworders.”
Demandfrom Asia helped Santiago-based Codelco,thebiggest producer, increasethe surcharge on sales to China next yearby35 percent, more than the 23percent increase for Europe,industryofficials said last month. Buyerspay the fee on top of theprice of LMEcopper for immediate delivery.
Thegainisdriving shares of mining companies. Freeport- McMoRan climbed36percentin New York trading this year, beating the 9.8 percent gaintheS&P500 Index.
Demand may also be boosted if JPMorgan,BlackRock Inc. and ETF SecuritiesLtd.start exchange-traded productsbacked by the metal. Such fundscould holdas much as 250,000 tons,Aurubis said in a report Nov. 15.Similarproducts backed by gold accumulated 2,098 tons since they started in 2003, equal to nine years of U.S. mine output.
“The real story is metals and we’ve dubbed this the metals decade,”
Mari Kooi,chief executive officer of Wolf
AssetManagementInternational LLC,said at the Bloomberg Link Hedge Fund andInvestorBriefing in New Yorkon Dec. 2. “What we have is a set up ofshortages inthe metals.”