If the IMF forecast of the world economy contracting 1.4 per cent this year comes true, the shrinkage will occur for the first time since 1945. How then, in this recessionary environment, the base metal copper could see a rally of over 80 per cent since January with its price at one point hitting a year high of $5,645 a tonne.
In fact, the red metal remains the best performer on UBS Bloomberg Commodity Index. But copper will still have to cover a lot of ground before it would come anywhere near last year’s record price of $8,930 a tonne. Copper’s point of glory in July 2008 when prices ruled exceptionally high was also celebratory times for other base metals and also steel.
Aluminium too has made some recovery to ride well past $1,800 a tonne. Market operators will not be surprised if the white metal now goes beyond $1,900 a tonne and at point in the near future there is a price spike to $2,000 a tonne and even beyond. They are not worried about the mountains of aluminium stocks with London Metal Exchange since a lot of that is tied up in deals to release cash for producers.
Once again it is the China factor which has proved to be the main catalyst for strong advances in copper prices so far with intermittent breaks marked by price consolidation. In yet another demonstration of its market canniness, the State Reserve Bureau of China started copper procurement through imports since the beginning of this year to rebuild strategic stockpiles. More than anything else, the low prices of the metal then triggered the Chinese restocking activity.
In the first half of this year, China imported 1.78 million tonnes of this “strategic” metal with June imports being a record 378,943 tonnes. China and also India have withstood the global economic meltdown better than any other country. Further, the $585 billion stimulus package giving a boost to industrial activity would underpin China’s copper demand growing up to 8 per cent or about 400,000 tonnes this year.
But traders are sniffing speculation in China lifting copper imports by 160 per cent in the first half. There is no doubt that even after providing for strategic stockpiles and meeting the requirements of the manufacturing sector, China will be left with a lot of the metal, which it may use for speculative gains.
In a case of excessive imports, as now has happened in China, there will be an inherent risk that the surplus may be sold back to the market for profits as well as to depress the market sentiment for future offtake. There have been instances in the past when China indulged in restocking and destocking in quick succession with an unabashed profit motive. Where then is the guarantee that China will not do it again with its overflowing copper stocks now?
Therefore, in the event of China going slow on imports now having already built a sizeable inventory, copper could be up for some correction. Whatever China may do in the coming days should not, however, distract attention, as Citigroup says, from copper’s “structurally sound medium to long-term outlook.”
The recent downward revision by International Copper Study Group of the world mine capacity growth to an annual average of 3.8 per cent over the next five years from the earlier 5 per cent should have some bearing on the metal prices. As is known, many new mine development projects had to be postponed or cancelled as their funding became a problem.
A point not to be missed is that copper demand and supply is remaining finely balanced generally with world consumption staying ahead of production at times. Traders will also be taking cue from the very low stocks with LME and comex.
Copper will also get some support from positive reports about new and existing house sales in the US. After being savaged for three years, new US house sales jumped 11 per cent in June. There is also some obverse relationship between happenings in stocks and commodities prices. Both are improving in tandem with dollar showing signs of weaknesses. Our Sterlite and Hindalco will be watching with some concern the rapid rise in Chinese imports of copper concentrate, an intermediate product for smelting and refining, also. Chinese concentrate import demand is set to rise 50 per cent this year.
Empirical evidences are there that when copper shines and there is also strong demand for concentrate, the mining groups will price concentrate in a way as not to leave much of a processing margin for stand alone smelters. Not a comfortable thought for Indian smelters which must always remain concentrate import dependent.
