Commodities | Jan 15 2008
By Chris Shaw
The strong start to 2008 by copper prices comes as something of a surprise given concerns over the health of the US economy and the potential for global economic growth to slow down but is justified according to those brokers who see the metal as the best positioned of the base metals for the coming year.
GSJB Were is one broker to have copper as its pick among the base metals in 2008 as it sees the combination of low inventory levels, a price premium in the Shanghai market and solid spot market activity as encouraging signs, though the broker also argues the real demand picture is unlikely to emerge prior to the Chinese New Year next month.
The other reason behind the broker’s positive view is the expectation 2008 will be characterised by further supply disruptions and delays, which will again limit any supply side response.
At the same time while it notes OECD demand for the metal is likely to be weak this will be offset by strong demand from China, keeping the market tight. RBC Capital Markets agrees there is a bullish medium-term outlook for the metal as it notes TC/RC (Treatment and Refining) charges are falling, which suggests a shortage of concentrates.
RBC also agrees with the view the supply side of the market remains vulnerable to any shocks, which has positive price implications given systematic traders hold significant short positions in the market and could be forced to cover their exposure as a result.
Macquarie though is less bullish for the base metals in general and copper in particular, noting the outlook is for a slowing in global growth and this will impact on metal demand.
As a result while the broker has revised higher its commodity price forecasts in general it has not done the same for the base metals, maintaining its relatively neutral outlook.
While Macquarie too sees some potential bullish factors from the possibility of stronger than expected Chinese demand and the likelihood of some supply side issues the broker’s view is the chance of a slowing in global growth puts a lid on price upside among the base metals.
This is a possible negative for copper as the broker notes the current spot price is the furthest away from its marginal cost of production in the sector, meaning it has the most price downside.
With this in mind the broker has cut its price forecast for the year to US280c per pound, down from US350c previously. Salman Partners has a similar forecast for 2008 of US285c per pound, down from the US325c achieved last year.
In Salman’s view the market commentary indicating the copper market is in deficit is simply incorrect, as over the first 10 months of last year supply exceeded demand by 0.4%, while in October supply was 1.7% higher.
Salman suggests those arguing China will help correct this imbalance are also wrong as China is currently a small net exporter, while the addressing of supply bottlenecks at the mine level this year should allow supply to increase by 5-5.5%, so widening the global surplus and bringing down prices through the year.
Metals specialists at Citi view copper as this year’s likely starperformer among the base metals.