Commodity price forecasting is a tricky business. Not the least because considerations like GDP growth, currency movements and monsoon behaviour play important in futures prices calculation. Naturally therefore, price forecasts generally come with a few caveats. If you like these are the convenient escape routes for analysts. The other day when newsmen asked Hindustan Copper chairman Shakeel Ahmed about his bets on average red metal price this and next year, he expectedly stopped by quoting forecasts by the likes of research house CRU. After all who wants to tread on thin ice?
While that may be so, Ahmed rightly says the demand scene in China, the US and the EU and also the moves by investment funds will all the time have a significant bearing on copper prices. What also needs to be factored in is whether the copper market balance for a year will be in surplus or deficit. In its recently published global copper market forecast, International Copper Study Group (ICSG) says, the “balance for 2010 could show a surplus of about 580,000 tonnes as growth in copper supply is expected to exceed projected weak growth in industrial copper demand. For 2011, a smaller surplus of around 240,000 tonnes is anticipated as increased economic activity is expected to boost demand in copper end-use markets.”
All this while, we came to believe in infinite demand for ferrous as also base metals, thanks to gorging by China. But the popular idea of Chinese demand forever for everything irrespective of price is no longer holding water. China factor is no doubt at play for the climb down of copper price, popularly perceived as a leading indicator of world economic activity, by over 10 per cent from the 21-month high reached in the first week of April. So overbearing is the presence of China on the demand side of copper or for that matter in other metals that any negative report about the country could not but be upsetting for the market.
What has not gone down well with the market is Beijing raising banks’ reserve requirements in yet one more attempt to rein in inflation. Market players have started factoring in the likely shrinkage in Chinese demand for copper as manufacturing and construction sectors will be coping with tighter credit. ICSG has forecast a fall of about 13 per cent in China’s use of refined copper use this year. The country alone accounted for about one-third of the world copper consumption of 18.206 million tonnes in 2009.
What here needs to be recalled is that the 38 per cent rise in Chinese demand last year helped in some smart rallies in copper prices from the lows spelt by memory’s worst recession. The general perception is, a good portion of copper that China imported last year went into stockpiling – haven’t we seen the same thing happening with iron ore – and the market will react bearishly as the stocks are drawn down in the face of demand shrinkage.
China has such an overarching presence in the commodity universe that the copper demand bounce back in the rest of the world cannot compensate for the decline in Chinese use of the metal. ICSG says, in spite of the “average apparent refined usage increase of 6.9 per cent” in the three major markets of the US, the EU and Japan, this year will not be able to arrest a global consumption decline of 1.5 per cent to 17.937 million tonnes. Subject to revision in the event of some major developments, ICSG is forecasting a 5 per cent recovery in demand next year to 18.851 million tonnes. Many agencies, ICSG not excepted, are not too sure about the sustainability of recovery in countries which felt the bite of last recession the most.
The world’s major financial markets’ stuttering performance shows unabated confusion about the economic environment. This is despite the good recovery in the US economy with first quarter results showing smart profits growth. Mind you, the US, where the automobile industry is experiencing reasonable demand and new house starts are hopefully awaiting a takeoff, is the world’s second biggest consumer of copper. The two major concerns for the market are the steady tightening of Chinese monetary policy and whether the stabilisation fund that the EU finance ministers agreed would be enough to stanch the sovereign debt crisis.
Copper prices, as trading on LME in the last few days suggest, are remaining bound within a short range even while the underlying demand remains fairly good. LME inventories are down to their lowest since end-December. Are we not also seeing cancellation of warrants standing for ownership of physical copper in certified warehouses in growing numbers? A Commerzbank report says: “A rise in cancelled warrants is not only interpreted as an increase in physical demand, but it often also supports metals prices.” But the market must feel confident about the world economy before copper prices move to the next level.