Has BHP Left An Olympic-Sized Hole In Copper?

By Jonathan Barratt

 

BHP Billiton ((BHP)) announced its annual net profit was down 34.8%. This reflects the current sentiment in the market towards the resource sectors. As we have mentioned before if Chinese growth slows so too will demand for the Australian inputs and thus a reduction in profitability is assured. One of the interesting aspects of the profit report was that the miner decided to mothball the US$30 billion Olympic Dam copper-uranium project. BHP CEO Kloppers in his announcement suggested that BHP would pursue a less capital-intensive option to replace the underground mine. This in our analysis provides and interesting aspect for supply of copper to the market going forward which we feel is worth noting.

At the beginning of the year we expected a deficit in the supply of copper to the market, noting that ongoing demand from China will keep prices buoyant. China in 2011 accounted for 39% of global demand with the US only 9.2%. As it panned out we did not see a recovery in the first part of 2012, in fact the very opposite. The market and prices have only been held up on the chance of stimulus and more stimulus. So far with the slowing global economy reducing the demand from China all is good and the price is stable. This is a convenient play for the supply, as it satiated demand. However, whilst demand for the product came off the boil globally, mining companies reacted by reducing projects, culling any expansion and laying off workers.

Re BHP'sannouncement on the Olympic Dam project. This is particularly worrying for us, as when the recovery mode starts for the global economy then we question ….do we have sufficient supply of the metal in warehouses to meet the expected demand? LME inventories continue to slip and are currently standing at 234,150 tonnes after the sixth weekly drop in seven weeks and this during a period of weak physical demand. Last weekend we saw that housing prices in Chine picked up and with renewed confidence starting to appear in the US, and optimism growing in Europe, we feel that as the market comes back from holiday and Chinese demand picks up before their holidays then the emergence of a deficit in supply is just around the corner. And the copper market will trade higher.

At the moment we remain long the metal and as noted last week it has been a long hard trade and very hard to hold on to the position. Yet we have. However, at the present we feel more confident that we will see a break to the topside and will be ready to add to out positions when it does.

Chart point

As suggested, copper is in a range US355 is the top end and US330 is the lower end.  We have failed to get a break below support and in fact the market has edged higher through near term resistance. The consolidation continues, however be careful about long positions as momentum indicators are at the top end of the band. A break of US350 sets the scene.