Copper Bears Predict End of the Metal’s Decade-Long Scarcity

on Oct 25, 2012
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**Impending Copper Surplus**

More than any other metal, copper is emblematic of a decade-long market in which supply struggled to cope with demand. While some metals’ prices have dropped this year, copper has largely held firm. Yet China’s slowing economy and the rising supply of copper ha given credence to the red metal’s bears. A growing number of traders and analysts believe that the copper’s decade-long price rise could be nearing an end, The Financial Times reported on 23 October 2012.

The intergovernmental organisation, International Copper Study Group (ICSG), expects a 458,000 tonnes copper oversupply next year, which would be the highest such market surplus recorded by the organisation in more than ten years. If this potential oversupply is sustained, prices could decrease, reversing the prolonged period of stellar profits for miners and impairing the economies of large copper producers such as Peru and Chile.

Other mining executives, analysts and traders also predict that the balance of copper supply and demand will become less strained in the next one to two years. According to BHP Billiton’s commodities sales manager Mike Henry, the copper market “is likely to be more in balance over the next couple of years than it has been for some time.” He believes, however, that “the fundamentals of the industry are still strong”.

**China’s Slowdown May Trigger a Shift**
The Chinese slowdown is seen by analysts as one of the most important reasons for a potential shift in the price of copper. Accounting for about 40 per cent of the global demand for the metal, China is moving at a slower, less investment-fuelled growth pace. And while in the early 2000s Chinese copper demand grew by 30 per cent, with the current slowdown such a drastic increase is very unlikely.

!m[Is Copper’s Long Bull Run Coming to an End?](/uploads/story/641/thumbs/pic1_inline.png)According to Goldman Sachs’s metals analyst Max Layton, the current weakness of China’s building industry could result in a sharp decline in building completions late next year, which would lead to a “significant downside risk to copper prices in late 2013”.
**Plentiful Mine Supply to Contribute**
While China’s copper demand is poised for a significant decline, the most likely price shifter in the copper market is the significant rise in mine supply. Over the past decade, miners’ inability to increase production has been almost as important as the growing Chinese demand in underpinning high copper prices. But now there is a new industry trend. The ICSG predicts the red metal’s mine supply to go up 6.4 per cent next year, which would be the biggest rise since the mid-1990s. Meanwhile, the Chile’s state copper commission, Cochilco, has already reported increased copper production. Output from Chile, the world’s top copper supplier, was up 7.8 per cent year-on-year in the three months to August.
The expectations of an increased mine supply have also been reflected in the concentrates — the physical market for copper ore. According to Peter Willbrandt, chief executive of Europe’s largest copper smelter Aurubis, in an indication of more plentiful supplies, smelters are likely to be able to charge higher prices to miners in annual contracts for next year.
The future increase in copper supply has become so apparent that even some of the most bullish investment banks have toned down their forecasts. Recently, Barclays has said that the market could see a “copper-bottomed supply response at last”, concluding that “the tailwind that copper has had for the past six to seven years is starting to abate”. Meanwhile, Goldman Sachs has recommended that miners “strongly consider” hedging against a drop in copper prices.
**Have Copper Bears Become Over-Optimistic?**
Despite numerous estimates, not all market participants believe the copper bull market is over just yet. According to some analysts, the copper bears have become over-optimistic about the prospects for mine supply.
Jim Lennon of Australian bank Macquarie said: “How many times have we heard this? Pullbacks to supply projects will be the commodity story over the next six months”.

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