China seen as cushion for softer copper prices

While metal's key contract is likely to continue falls, top buyer's demand will rise, analysts say

PUBLISHED : Monday, 10 February, 2014, 4:31am
UPDATED : Monday, 10 February, 2014, 4:31am


Prices of copper - the bedrock industrial metal and a benchmark for gauging the strength of the global economy - are likely to soften further in the coming year as production growth is expected to exceed that of consumption.

However, any weakness may be cushioned by steady demand on the mainland.

The price of the benchmark three-month forward contract on the London Metal Exchange may average US$7,078 a tonne this year, 3.7 per cent lower than last year, according to the average estimate of 28 analysts polled by Bloomberg. Prices have fallen 16.7 per cent in the previous two years amid global economic weakness.

"The general feeling in the market is for copper to go slightly lower this year due to rising production," Jeremy East, Standard Chartered Bank's global head of metals trading, told the South China Morning Post. "Things may not be as bad as the market is thinking ... we may see slowing economic growth in China, but it is still somewhere above 7 per cent. I see China buying more copper this year than last year, and prices will also be supported by the economic recovery in the US and Europe."

The mainland accounts for about 44 per cent of global copper consumption, estimates by British bank Barclays showed. Copper is the most widely used industrial metal, found in products from vehicle parts and electronics to home appliances.

Analysts at Swiss bank UBS said in a research report that mine supplies of copper ore and concentrate are seen rising by "high single digit" percentages this year, which would lead to higher supply of refined copper and could see its price fall to as low as US$6,500 a tonne in the year's first half.

This is despite reports that monopoly power distributor State Grid Corp - China's largest copper consumer - planned to raise its spending on new power grid construction by a larger-than-expected 13 per cent this year.

Inventory at the London Metals Exchange, where most of the world's copper is traded, stood at 311,225 tonnes at the market close on February 4, down 55.4 per cent from June last year, and amounted to about 1.5 per cent of global consumption.

CLSA commodities strategist Ian Roper said in a report the LME draw-down, coupled with stocks at warehouses sanctioned by the Shanghai Futures Exchange standing at a one-year low, appeared to suggest supply has been absorbed by strong demand.

But he cautioned that "invisible" inventories kept outside official warehouses may have made it difficult to gauge the strength of real demand.

Analysts at Barclays, among the most bullish of the pack, forecast copper to rise to US$8,000 a tonne next year, as they expect supply growth to peak this year and slow from next year, while global demand growth picks up.

East said the rising production growth will reverse at some point, since the biggest miners have all slowed investment in new mines. "When demand comes, it comes quickly, but supply can't happen like that; it takes two to five years," he said.

The outlook for aluminium, another key metal and which is used as a sign of the health of the global economy, is similar. The polled analysts predicted the price of the three-month forward contract on the LME to average US$1,866 a tonne this year, 1.2 per cent lower than last year, after having fallen 22 per cent in the previous two years.

China accounted for about 46 per cent of the world's consumption of the metal.

Analysts said prices would be weighed down by an inventory overhang. LME aluminium stocks stood at 5.4 million tonnes on February 4, or 10.7 per cent of last year's global consumption.

However, they added that demand would be supported by the vehicle sector, especially as the US replaces its ageing stock of vehicles. The average age of a car in the US is 11 years old, according to industry officials.

Sanford C. Bernstein senior analyst Vanessa Lau also noted in a research report that US car giant Ford Motor's recent debut of the aluminium-intensive 2015 model of its best-selling F-150 pick-up, could herald a global trend of greater consumption by vehicle makers of the lightweight metal. Under US legislation, new cars and light trucks must be almost twice as fuel efficient by 2025 compared with 2011.