Commodities | Aug 10 2010
By Chris Shaw
From a supply perspective there appear to be a number of reasons to be bullish on copper, RBS noting in recent years copper production overall has consistently fails to meet targets.
The trend has continued this year, the broker noting June quarter production by most of the major copper producers was down on both a quarter-on-quarter and year-on-year basis.
In RBS's view, lower grades are a primary reason output is being constrained, as world mine capacity utilisation has fallen from around 94% in 2001 to about 77% now as average copper head grades have fallen from 0.9% in 2002 to 0.7% last year.
The other major factor is a limited pipeline of large new mines, which together with falling grades paints a bullish long-term backdrop for the copper price.
UBS is also bullish on copper's fundamentals, especially given recent merchant premiums and stabilising inventory levels suggest China is topping up on the metal. Sentiment has also improved following comments by President Hu Jintao that China would make moves to support economic growth in the second half of this year.
As commodity prices have already moved on this improved sentiment, UBS expects only a muted response now, one of support for prices rather than another move higher. The next clear positive driver for the copper price in the broker's view won't be until the first quarter of next year, when China begins its next conventional restocking cycle.
UBS is forecasting an average global copper price this year of US$7,000 per tonne, rising to an average of US$7,547 per tonne in 2011. Longer-term RBS is even more bullish, forecasting a new record high for copper of US$10,000 per tonne by 2013.
Across in iron ore, Goldman Sachs notes seaborne spot prices have risen by 24% to US$144 per tonne since bottoming in mid-July. The gains have come at a time of limited availability of spot cargoes from India and on thin volumes, so the broker suggests it is possible the price recovery is a case of “too much too soon”.
Goldman Sachs had forecast prices would bottom out in the third quarter but the recent rally implies this has occurred sooner than expected. As an example, the broker notes mark-to-market prices for the September quarter at spot are currently US$137 per tonne, which is about 20% above its forecast for the period.
This suggests some upside risk to Goldman Sachs' forecasts but the broker notes Chinese buyers remain nervous at present and are still not buying more material than they immediately require. This leads to the suggestion current prices should be treated with some caution.
Turning to oil, Credit Suisse notes crude prices have risen by more than 10% since the start of July, reflecting both improved supply and demand fundamentals as well as improved sentiment from a positive US corporate earnings season.
The problem with such factors driving the oil price in Credit Suisse's view is while positive news can support prices, the market also remains susceptible to negative news. This implies further volatility in prices in coming months.
This is especially the case as some seasonal factors for oil turn less positive in coming weeks, as US reporting season is winding down and the summer driving period is peaking. These factors are enough for Credit Suisse to remain cautious on the oil price outlook for the rest of 2010.
The broker has not changed its long-term price forecast of US$80 per barrel, its view being prices need to remain around US$60-$80 per barrel range to finance the new supply required to meet demand growth and offset natural field declines.
