Commodities | Apr 07 2009
By Chris Shaw
With copper prices trading at a five month high last week it would have been reasonable to assume the mood at the CESCO copper conference in Chile was reasonably bouyant but as Barclays Capital notes the prevailing mood was more one of caution and concern.
Barclays points out industry players remain worried about the poor fundamentals of the market as while Chinese buying has been strong, demand is falling sharply in Europe, the US and Japan. This supports increasing scepticism as to whether or not current price strength can be sustained, an outcome GSJB Were sees as increasingly unlikely given the overall weakness in current demand.
In the broker’s view, Chinese demand, which as Barclays points out is being driven by the State as it looks to build stockpiles of the metal, is likely to slow in the current quarter, which would then highlight just how weak demand is elsewhere in the world.
Given such expectations, the broker sees those with short positions being brave enough to extend these positions, which would set the stage for a significant correction in the price of the metal in the near-term.
The demand side supports such a view as Weres notes CRU International is forecasting global demand could fall by as much as 15-20% this year, while Barclays points out participants at the CESCO conference are on average looking for demand to decline by 5-10%.
The expectation is Chinese buying tails off by around June, as Barclays notes producers in Chile, Australia and Japan are sold out until that time. Given European demand is extremely weak, any reduction in buying from the Chinese could see the market balance take a turn for the worse given it is the combination of this buying and tight scrap markets currently supporting prices.
This lack of available scrap has forcd a switch to using refined copper rather than scrap in smelting, an outcome Barclays estimates could add as much as 500,000 tonnes to global demand this year. But as noted, even this is unlikely to be enough to prevent global demand falling significantly over the year.
Barclays also took some other points out of the conference, the most significant being even while the labour and power issues that caused problems for Chilean output now appear to be resolved, that country’s output is unlikely to increase this year compared to 2008.
One reason is declining grades at major projects such as Chuquicamata, while the group also notes mill repair work at Escondida will cost some weeks of production and so limit output.