Uncertainty over industrial growth in the user segment due to geo-political events, dwindling European sovereign debt problems and shaky outlook for industrial production in key markets could result in a major liquidation of copper in the first half of the current calendar year. As a consequence, copper prices may fall three per cent to below $9,000 in the next two months, says Copper Survey 2011, a report published by GFMS.
The metal is currently quoted at $9,300 a tonne on the benchmark London Metal Exchange (LME). The London-based independent consultancy estimates that the copper market went into deficit in the second half of last year, more than offsetting the small surplus noted in the first half of 2010. The swing to deficit was the result of accelerated growth in mature economies’ consumption, further increase in Chinese offtake and lacklustre growth in mine production. Despite a significant increase in secondary production boosting total refined output, the consultancy estimated that the global refined consumption exceeded supply by 286,000 tonnes.
While outlining the main findings of the report, Nikos Kavalis, senior analyst for copper at GFMS, said on Tuesday in Chile, “The sharp improvement in copper fundamentals rekindled investor in the red metal, after a period of relative weakness, in the aftermath of the European sovereign debt crisis.
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The combination of a tight physical market and strong investment demand saw prices rise to a series of all-time highs late in 2010 and in the first few weeks of 2011, peaking to $10,148 a tonne on February 14.
The continued recovery of mature economies, consumption and strong underlying increases in demand in developing countries, led by China, should result in global refined consumption remaining strong in 2011. Although, mine production is also expected to accelerate and scrap volumes to rise further, refined production is unlikely to outpace demand this year. As such, the market is expected to remain in a deficit at least through to the end of the current year.
Despite this favourable fundamental backdrop, a noteworthy correction cannot be ruled out in the near term. The ongoing monetary tightening practices by China, coupled with the continuous debate over interest rate increase by the European Central Bank, may prove a dampener for copper in the immediate near term. There has been lack of demand from Japan, too, said Naveen Mathur, associate director, commodities and currencies, Angel Broking.
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However, the demand will start recovery three months down the line, when the Japanese government again starts rebuilding infrastructure was damaged in the recent catastrophe. Fortunately, manufacturing activities in the US are also on the rise, which will boost copper demand and its prices by the end of 2011, said Mathur.
The price decline would be short-lived. Eventually, investors would regain their confidence in copper’s long-term fundamentals and return to the market. Coupled with a tighter fundamental market, as deficits continue to work their way through stockpiles, this will see prices resume their upward trajectory and a new peak towards the $11,000-a-tonne mark will be breached in the second half of the current calendar year, the GFMS report said.