Copper inches towards an all-time high, but a correction may be on the cards over the long term
Sharad Matade 28 October 2010

Current prices are hovering around $8,500/tonne due to the skewed demand-supply equation, but analysts feel that this rate may not be sustainable, and prices may well dip to $7,500/tonne in the coming months

Copper prices may touch their all-time high of $8,930/tonne as the dollar continues to lose its value against most global currencies, coupled with the growing gap between (increasing) demand - especially from Asian countries - and the (tight) supply scenario,. However, analysts say a short-term correction may be on the cards.

"Copper has the strongest fundamentals based on the demand-supply scenario among all base metals. Only three metals are in deficit - steel, copper and nickel. In 2011-2012, we are expecting deficit of the red metal (to be) between 1,00,000 tonnes to 4,00,000 tonnes, which will tighten the market further," an analyst with Sharekhan told Moneylife, preferring anonymity. 

ABN AMRO, in a recent report, said that copper prices have been showing an uptrend throughout the third quarter and may touch an all-time high of $8,930 per tonne. In July 2008, prices touched the highest level of $8,930, added the report. It also predicts a deeper deficit of copper in 2010 of 1,29,000 tonnes, moving to a large deficit of 4,42,000 tonnes in 2011, as a number of dynamics weigh on the market.

"Due to the weak dollar and rising demand from auto, construction and consumer goods in developing countries, mainly China, India and south east Asian countries, copper prices have been increasing since last year," said an analyst from ICICI Direct.

The International Copper Study Group (ICSG) estimates that world refined copper consumption exceeded output by 3,56,000 tonnes during the first seven months of this year, as compared with a deficit of 1,64,000 tonnes in the same period last year. During the period (January-July 2010) production of copper stood at 11.03 million tonnes (MT), while consumption amounted to 11.39MT, said ICSG.

However, the market situation might change in the coming months. Growing demand could be restricted following tight supply and falling inventories at the London Metal Exchange (LME). Inventories at the LME have dipped to their lowest level in a year and the market may face a shortfall next year. 

LME copper stocks fell by 450 tonnes to 3,68,375 tonnes on 25th  October. The LME copper inventory has fallen by more than 5,400 tonnes in this month so far, showed a report, published by ADMISI Commodity Research Limited.

"There is no new supply in the market and it is not likely to come within the next 1.5 years as global copper producers are in the initial stage of developing new mines," said the Sharekhan analyst.

Even though for the short-term, copper prices are moving towards their highest levels, prices still might come down.

"The kind of sharp rise in price we are seeing can be attributed to the weak dollar, and the tight demand-supply factor is also there, but this would not be enough to support high prices. So I think some correction could take place," said the ICICI Direct analyst.

"Copper is a volatile metal, we can see a $200 upward movement in a good day, so we are not far away from the highest price. We will see prices from $8,600 to $8,800 per tonne soon. But we would also see some correction in prices (over the long term) and the range would be $7,500 to $7,800 per tonne on an average basis," added the analyst.

In India, demand for copper would be fuelled by the power, consumer appliances and real-estate sectors. Under the XI Power Plan (2007-2012), the government has planned to invest $86.9 billion in the power sector with 150 power projects currently in various stages of construction.

However, the global tight demand-supply factor would also impact India's copper demand as the country is a net importer of copper.

"Though Hindustan Copper Limited has vast copper reserves, they are not ready to mine it soon. So the demand-supply scenario will remain tight in the near future," said the ICICI Direct analyst.

Even though copper production is estimated to go up by 800,000 tonnes in the next year, this target could be hampered due to delays in developing new mines.

"Banks and copper companies have proposed an idea of exchange-traded products (ETPs) in the copper market and it is estimated that about 60,000 tonnes to 70,000 tonnes of copper will be taken from the market through ETPs, which will lead to a greater deficit," added the Sharekhan analyst.

BlackRock Inc and ETF Securities Ltd plan to introduce ETPs in the copper market. So at least for now, copper prices will remain on the higher side.
 

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