Copper decline expected to continue

Weak demand growth seen from user industries, given the world economic outlook and high stocks

The price of copper might decline 15 per cent this year from the current level, due to falling demand from the manufacturing sector, especially in developed countries.

Trading currently at $7,588 a tonne in early London trade, the price has fallen five per cent in the first quarter, a trend continued from last year. Trading sideways since the fourth quarter of 2011, the red metal declined 10 per cent in 2012.

“The continued uncertainty surrounding the Euro zone has recently been exacerbated by the eruption of the Cypriot debt and banking crisis. This, together with the ongoing caution regarding the economic outlooks for both the United States and China, has helped to keep sentiment in the copper (and broader commodities) market on the backfoot,” said Sanjay Saraf, head of Base Metals Research & Forecasts, Thomson Reuters GFMS, at the launch of the Copper Survey 2013 in Santiago, Chile.

Also, there has been a rise in global exchange stocks and in estimates of copper inventories in Chinese bonded warehouses in 2012, he said. “The metal could spend much of the year within the recent broad trading range, with growing negative market sentiment weight risk to the downside, with around $6,500 as a potential level of support if selling intensifies,” he added.

Global mine production grew four per cent to 16.7 million tonnes last year, after consecutive years of barely positive growth. This was the highest annual increase since 2004. In 2012, shortfalls versus target production were more characterised by the net fall in grades and recoveries, rather than unexpected disruptions. This is, arguably, more representative of a longer-term structural trend in the industry.

Meanwhile, world refined copper supply increased two per cent to 20.1 mt and, in contrast to mine supply, represents a decline in the rate of growth when compared to the previous two years. This also corresponds with a moderation in the rate of supply from secondary sources, although total production from scrap of 3.6 mt was still three per cent higher than in 2011.

Global consumption totalled 19.8 mt in 2012, up less than one per cent year-on-year. The sharp slowing in the rate of expansion in Chinese demand was a primary factor, with growth halving to four per cent last year, as the wider slowing in economic growth and a high level of downstream product inventories, most notably in the appliances market, weighed on performance.

The European Union was the major area of weakness, with all end-use sectors recording declines, as sovereign debt concerns and stagnation in economic activity weighed on demand, the Survey said.

Overall, world copper consumption within the building construction sector fell one per cent last year. The electrical and electronic products sector (the largest end-use segment) saw a two per cent increase, driven by growth in demand from the power utilities sector in the emerging economies and, in particular, China. The consumer and general products sector was the worst performing end-use segment in 2012, with consumption sliding three per cent on weak demand and high inventories in the appliances market, although robust performance in the tablet and smartphone sectors helped restrict further weakness.

“Copper prices were down on weak manufacturing data from the US, China and the Euro zone, which pushed prices down. However, a weaker dollar after poor data and ultra-loose monetary policy adopted by the Bank of Japan limited the downside in prices,” said Kunal Soni, an analyst with Emkay Commotrade.

Base metals are expected to go down, as demand from China has been very modest and all-time high inventories in warehouses will continue to push prices down, he added.