Commodities | Nov 02 2010
By Chris Shaw
Copper prices have risen by better than 30% over the past few months, Deutsche Bank suggesting the gains have come from a number of factors including improved stability emerging in Western demand, resilient Chinese imports, a weaker US dollar and anticipation of the launch of physically-backed copper Exchange Traded Funds (ETFs).
Deutsche Bank now believes copper prices are more likely to weaken near-term rather than continue their rise, as the positive drivers of the market are now being priced in. As well, there are some short-term demand concerns given the threat of further quantitative easing measures is evidence deflation remains a serious concern for policy makers.
Deutsche also suggests there is some danger for copper prices in coming months from weaker than expected Chinese consumption growth, which the broker suggests could be close to zero in 2011. This stems from a strong expansion of money supply in China over the past couple of years, which may pressure Chinese inflation and force both interest rates and the Chinese currency higher.
Deutsche Bank sees this as a potential threat to Chinese economic growth and as a result the country's demand for copper. Some market data support this view, the broker noting Chinese fixed asset investment growth in primary industry in China has fallen over the past two years and is expected to continue its downward trend in 2011.
Deutsche expects this could moderate copper consumption, a shift likely to be supported by evidence the Chinese government appears to be entering a phase of monetary tightening.
The run in the copper market over the past few months has prices approaching levels last seen in 2007/08, which has caused Deutsche to turn its attention to market fundamentals. While in 2007/08 exchange stocks were at historic lows, the market currently is nowhere near as tight as total exchange inventories stand at around 550,000 tonnes.
At the same time, the outlook for demand growth is one of deceleration in Deutsche's view, as risk to Western World demand is rising as evidenced by the need for further quantitative easing measures. The copper price is now at a solid premium to its marginal cost of production and Deutsche argues this premium is excessive when related to current physical stock levels.
Deutsche's expectation of copper price weakness reflects a short-term view, as longer-term the broker accepts physical fundamentals for copper remain very strong. Mine supply continues to struggle to match demand and Deutsche forecasts market deficits of 200,000 tonnes in 2011, then 150,000 tonnes in 2012.
There is a risk these deficits become larger than forecast if a copper ETF is launched, though as Deutsche notes any financial demand from an ETF is very difficult to quantify. This would also make forecasting the copper price more difficult as the price would therefore deviate from what is justified by only physical market fundamentals.
With respect to the potential launch of a copper ETF, RBS notes this could impact on what it, in contrast to Deutsche Bank, views as a fundamentally tight copper market. According to RBS numbers, current total copper inventories are on a prospective 3.3 weeks of consumption based on a 2011 world copper demand forecast of 19.45 million tonnes.
This suggests a relatively small investment in physical copper ETFs could have a big impact in tightening up the physical market. To reflect this, RBS suggests it is likely a case of when, rather than if, the copper price will hit the US$10,000 per tonne levels.
Timing is the issue, as RBS currently expects this level will not be hit until after 2012. This reflects a view expectations for higher prices are likely to see increased substitution and thrift emerge in the copper market, while also potentially causing the release of unreported Chinese stocks. A copper ETF could change this and force RBS to bring forward its price forecasts.
Citi is similarly bullish on copper thanks to the combination of global mine production continuing to fall short of expectations and an expectation global inventories will fall from around 2.7 weeks now to below two weeks in 2011.
This offers upside risk to price forecasts. Citi is currently forecasting copper prices of US310c per pound at the end of December, US330c per pound at the end of June next year and US327c per pound at the end of December 2011.
