Analysts looking for copper deficit, higher prices in 2011 | 09 …
By Allen Sykora of Kitco News
(Kitco News) - Analysts expect the global copper supply/demand balance to be in deficit during 2011, with higher prices as a result. In fact, some are looking for record highs above $10,000 a metric ton.
Copper recently traded to its strongest level in two years before correcting lower. Some consolidation and volatility may occur in the foreseeable future, but the longer-term uptrend is expected to continue, analysts say.
“Over the medium to longer term, I’m very bullish on copper,” said Leon Westgate, analyst with Standard Bank. “The market is basically in deficit. You simply have not enough supply coming through to meet demand for the metal. I think this will underpin copper prices for several years to come and the market will tighten up even further.”
Three-months copper on the London Metal Exchange was trading around $8,285-$8,286 a metric ton late Friday. The most-active December contract on the Comex division of the New York Mercantile Exchange was around $3.7690 a pound.
Westgate looks for the metal to hit a fresh record high in the next two years, maybe even as soon as the first half of next year. The peak for LME copper was $8,940 a metric ton in July 2008. Eventually, copper could trade above $10,000 a ton, Westgate said.
Goldman Sachs issued a report this week saying it looks for “periods of extreme tightness” in the copper market during 2011. The bank lifted its three-, six- and 12-month forecasts to $8,500 a metric ton, $8,800 and $11,000. Goldman listed a full-year 2011 average forecast of $9,300.
“Even relatively conservative demand forecasts suggest that the global copper market will sustain deficits large enough to mostly deplete exchange inventories over the next five quarters, leading to periods of extreme volatility and price spikes, in our view,” Goldman said.
Goldman looks for global copper demand growth of 6.8% in 2010 and 6.1% in 2011. Furthermore, it suggested risks to its demand outlook are skewed to the upside, since world demand excluding China remains below pre-recession levels. Meanwhile, Goldman projects 3.4% global supply growth for 2011.
Westgate looks for a small supply/demand deficit of 58,000 metric tons this year, which he characterized as “essentially a balanced market.” Standard looks for refined-copper output to grow 4.7% this year, with consumption up 7.9%. Then he looks for a deficit of 199,000 tons next year and 457,000 in 2012.
Patricia Mohr, vice president with Scotiabank, looks for 2011 deficit of around 345,000 tons. BNP Paribas and BMO Capital Markets both project a 400,000 deficit next year.
Brian Hicks, co-manager of U.S. Global Investors’ Global Resources Fund, said he looks for consolidation in copper into year-end, with $4 per pound acting as a ceiling. But then in 2011, he looks for an average price of $4.
“We think copper is going to be very tight and in a deficit, in terms of demand outstripping supply,” Hicks said. “We still have a lot of constraints that are holding back supply. We think that will continue for the next few years. On top of that, demand has been relentless despite higher prices, mainly from China.”
The supply constraints include lower ore grades, delays in bringing new projects on line due to financing issues since the 2008 global credit crisis, along with labor issues in South America and Mexico, Hicks said.
Much of China’s copper demand is for developing its infrastructure, particularly the power grid, analysts said. Mohr also cited government incentives for purchases of appliances, which require copper. She looks for Chinese demand for refined copper to increase another 10% next year after a roughly 13% increase projected for this year.
Meanwhile, Hicks said, there are signs of a demand pick-up in Western nations, where inventories have been drawn down.
Inventories of copper, stored in warehouses affiliated with the world’s major trading exchanges, have been declining steadily since early in the year. As of the beginning of October, combined inventories from Comex (converted to metric tons), the LME and Shanghai Futures Exchange stood at a combined 538,252 metric tons, reported John Gross, an independent metals-industry consultant. This was down 32% from a high of 793,184 in the week of Feb. 26.
Gross also looks for further gains in copper in 2011, but he offered two caveats. The picture could change some if the dollar should rally strongly or major Western economies fall into a double-dip recession, he said. A muscular greenback makes commodities more expensive in other currencies and thus can hurt international demand.
Volatility Could Occur During Remainder Of 2010
While analysts are bullish on the red metal for the long term, several also suggest some volatility is likely for the shorter term.
The main catalysts behind the most recent drive higher were the declining warehouse inventories and the weakness in the dollar that has generally underpinned base and precious metals, Gross said. Then came a Thursday decline in copper as some speculators sold to book profits.
“The expectation here is we are going to see continued volatility at the higher levels,” Gross said. Much may hinge on the greenback, he continued.
Mohr also anticipates volatility. One key will be an upcoming report on third-quarter gross domestic product in China, she said.
“If GDP growth in the third quarter is 8.5% to 9%, I think the price will kind of stabilize,” she said. “If it’s better than that, it will probably go up further. If it’s less than 8.5%, it may correct a little.”
However, any pullback in copper on a weak GDP figure may be temporary, Mohr continued. This is because economic growth below 8% may prompt Chinese authorities to ease monetary policy, she said.
Westgate looks for further copper gains in the fourth quarter. He anticipates the seasonal pattern of the Chinese returning to the market as buyers late this year and early next, although higher prices may curb some of re-stocking. However, high prices could also mean more supply of scrap copper, Westgate added.
By Allen Sykora of Kitco News;
