Demand to keep prices firm

IN FOCUS / COPPER

The prices of copper are set to rule firm at an average of $2,400 through the end of 2004. There has been a sharp decline in London Metal Exchange (LME) copper stocks to a 14 year low in August. This, coupled with continued demand fuelled by China, and economic recovery in USA, Japan and the European Union, would keep prices firm.

Copper consumption in China has sustained its growth in the second half of the year despite the country's efforts to rein in the scorching pace of economic growth. Over the last three years China's consumption has grown to 19 per cent from 10 per cent.

In India, copper consumption grew by over six per cent in the last fiscal to 440,000 tonne in spite of a shift from copper telecom cables in favour of optic-fibre cables.

The gap caused by the shift was filled in by strong growth in demand for copper in building wires and transformers which saw roughly a 15 per cent growth, and auto-components and railways, which grew 12 per cent in the last year, according to the International Copper Promotion Council of India. (ICPCI).

Analysts expect copper demand to continue growing at around 5 per cent over the next two years. The upcoming power projects in the country were also expected to accelerate the domestic usage of copper over the next 2-3 years.

On the supply side, the domestic copper majors cut production massively over the last year to offset the rising cost of raw materials.

Of the three major copper producers - Hindustan Copper, Hindalco and Sterlite Industries, only the first had mines. The other two imported copper concentrate.

The global copper production towards the end of 2003 fell following the suspension of mining in Asia's largest Grasberg mine in Indonesia after a rock slide in December and the slowing of production in the Escondida mine in Chile.

With the copper concentrate supply tightening, there was a drop in the TC/RC (treatment charges/refining charges) margins as well to 11-12 cents/lb from an average of 17 cents/lb the previous year.

It was expected to recover in the coming months with a slow increase in supply with the resuming of operations in the Grasberg mine since April.

The Union budget of the United Progressive Alliance (UPA) in 2004 announced a further cut in import duty of copper to 15 per cent from 20 per cent while import duty on copper concentrate was at five per cent, keeping the differential at 10 per cent.

While this duty cut could erode operating margins over the next year, the upward looking TC/RC margins were expected to neutralise the negative effect.

Besides, zero duty imports routed through countries like Sri Lanka were also providing cheaper alternatives for domestic user industries especially for electrical fittings.

Domestic producers were therefore more comfortable with exports than domestic sales. The larger producers were also looking at expansion led growth through volumes.

In the first quarter of the current fiscal, Hindalco expanded capacity from 180,000tpa to 250,000 tpa. Sterlite expanded capacity from 180,000tpa to 300,000 tpa.

After expansion by end-2004, the unit would begin production by first quarter of 2005-06. In the first quarter of 2004-05, metal producers saw a 55 per cent rise in growth.