Precious metals consultancy GFMS reports in its 3-Year Copper Forecast – August 2009 publication that although prices have slipped by around 5% since the recent high of $6,419/t, the underlying fundamentals are still there. On an average annual basis, it expects higher copper prices each year out to 2012. It also said that a strong recovery in consumption coupled with slower mine production (and by implication refined production) growth have caused it to predit an 88,000 t deficit for 2010. In addition to the direct impact of the improvement of the fundamentals on prices, the swing of the market to deficit (as well as the improvements in the wider commodities complex) is also expected to trigger additional investor interest in the metal, which will further boost prices. In 2010 it forecasts copper cash prices to top $7,500/t, averaging $6,500/t.
Inevitably, the focus of the market in late July/early August has been on the impact of investment funds. However, there has been support from the underlying fundamentals. The tightness stems from the shortage of concentrate. GFMS forecasts that global concentrate production will decline by 1.6% this year following no growth in 2008. Latest developments in spot treatment charges reflect this situation, and the decline in spot treatment charges is sending ‘bullish’ long-term signals to the copper market. In the key Chinese market, spot TC/RCs in early August have fallen to $20/t from $40/t in June and $90/t at the beginning of the year.
The deficit is expected to persist throughout the rest of the forecast period, and its magnitude in fact grows in 2011 and 2012, to 121,000 t and 176,000 t respectively. It should be noted that not all of the inventory reduction will take place on the LME as GFMS believes that there has been a build of unreported inventories within China. Therefore its supply-demand balance projections suggest that LME inventories will trend lower over the forecast period but may not reach the levels of under 100,000 t briefly seen in the recent bull market.
Its 2009 figures have been revised on account of strong Chinese consumption, coupled with expectations for a recovery outside of the country to commence late in the year. This has led the consultancy to predict marginal growth for the full year in terms of demand. The forecasts for production, in contrast, remain more or less unchanged. As a result, it has reduced its forecast of the likely surplus for 2009 to just 245,000 t from an earlier estimate of 441,000 t.
The 245,000 t surplus forecast for the year does not, in GFMS’view, necessarily contradict the decline in LME inventories registered this year-to-date as much of that material found its way into unreported inventories, largely in China. As these inventories begin to weigh on the local market, it expects imports into China to fall, resulting in LME stocks beginning to once again rise. Indeed this has already started, with initial import data for July (which covers both metal and products) showing a 15% month-on-month decline.
Coupled with some profit-taking by investors, this will drive a decline in copper prices in the short-term. Nevertheless, as the trends in supply and demand are clearly suggestive of a noteworthy improvement thereafter, this is expected to be short lived, with funds and end user front-running triggering a move to deficit in 2010, setting a positive trend for the price from Q4 this year. At that stage, the consultancy would not be surprised to see prices topping $6,500/t and generating a Q4 average of $6,000/t, resulting in a full-year figure of $4,900/t.
