Copper to rebound in second half of 2012

Copper may see a turnaround and test $10,000 a tonne once again in the second half of 2012 on supply concerns and indications of improvement in the world economic scenario. The red metal, regarded as an indicator of economic growth, remained volatile in 2011. After hitting an all-time high of $10190 a tonne supported by supply-side worries, the price slipped to a low of $6635 a tonne on account of global economic concerns and its impact on consumption growth of industrial metals.

The world production of refined copper increased 3.1 per cent in 2010, but tightness in the global concentrate market due to lower ore grades and ageing mines capped production increases. The production growth is expected to be slower than the estimated rise in consumption on account intensified labour disputes in the world’s largest copper mines in Chile, Indonesia and Peru.

Leading global advisory firm Economists Intelligent Unit (EIU) estimates copper supply to moderate to 2.3 per cent in 2011, due to increasing risk associated with supply of concentrates, smelters and refineries. Gradually, global copper smelters have grown dependence on scrap as the raw material.

For the record, the global production of copper scrap has increased sharply and secondary refined copper production is growing at a faster pace that primary production. Data from the International Copper Study Group indicate that global secondary production rose by 18.3 per cent year-on-year in 2010.

Concerns over the supply front in the case of copper remain. This factor, coupled with an improving economic scenario in the US, will be supportive for copper prices after the second quarter of 2012. China is expected to loosen its monetary policy in the coming year. The return of credit in the market will also help support demand from the end of fabricators. But until then, one cannot ignore developments on the euro zone front, which have been a major influence to prices in 2011, notes Angel Broking. “Any further negativity with respect to the same can act as a deterrent to upside in prices in the next three-four months,” points out Naveen Mathur, its associate director.

Globally, copper consumption growth slowed to 2.8 per cent in 2011 as a result of weak demand in the EU and the US. Coupled with this is the impact of monetary policy tightening in China -- the country that accounts for 47 per cent of world copper consumption. High borrowing costs in China led to a slowdown in manufacturing and construction activities. Lack of access to credit had a major impact on copper fabricators, as they struggled to finance working inventories. Since the start of the third quarter this year, there has been an improvement in Chinese demand, but this does not indicate real consumption, as it is backed by restocking at lower price levels.

Fabricators in China continue to rely on hand-to-mouth strategies in the current market scenario, as borrowing costs have become a big concern. But a bounce-back in world copper consumption growth by 3.2 per cent is expected in 2012 on account of expected loose monetary policy in China and the restocking cycle, said Mathur.

“Copper prices plunged after rising in the first quarter of the year as the metal soared to its lifetime high. Sell-off was however seen in second half of the year due to subdued global demand on the back of sovereign debt crisis in Europe. Moving forward in 2012, Chinese demand remains the biggest concern as Chinese smelters are currently worried about power shortages that could hurt production.