Copper: Not wired for price revival

Copper is feeling the pinch lately and prices may remain soft in 2015

Copper prices, which avoided a meltdown in 2014, are being hammered since the start of 2015. Copper prices on the London Metal Exchange (LME) dropped 15 per cent in 2014 to $6,400 a tonne; this is not a bad show, given that other metals such as iron saw their prices cut in half. It not just belied analyst expectations last year of a price revival, but has dropped to a low of $5,500 a tonne currently.

Weakness to continue

Even after such a steep drop, copper prices may continue to remain soft in 2015 due to three factors — unfavourable demand-supply dynamics, strengthening dollar and falling crude prices.

These reasons could keep copper from clawing back any gains this year.

On the supply front, data from Bloomberg shows that 1.63 million tonnes of new copper supply may come online in 2015. Copper demand, which remained robust at 4.7 per cent in 2014, is expected to remain around those levels. The additional supply would likely lead to a surplus of around 500,000 tonnes in 2015. Data from the World Bureau of Metal Statistics shows that copper supply had exceeded demand since 2008, with 2010 being the only exception.

Analysts are, however, divided on the pace of demand pick-up and hence on surplus levels. On the one hand, signs of economic strength in the US are helping lift copper demand sentiments. Demand from the country’s housing market, which is a key driver of copper price, is showing signs of revival. Also, 300 infrastructure projects are on an accelerated schedule in China during 2015 — the last year of its 12{+t}{+h} five-year plan period. These two countries account for over half of the global copper consumption. So, a recovery in Chinese and US demand may change the picture and limit the downside in copper price.

On the other hand, slowdown in the euro area is raising concerns of a slowdown in consumption. Add to this, inventory levels on the LME stand high — at 178,425 tonnes early in January; stockpiles on the Shanghai Futures Exchange were also at eight-month highs.

Since the start of 2015, prices have dropped around 3 per cent, the worst start to a year since an 11 per cent slump in 2007.

Falling crude prices will help reduce the refining cost of copper and hence limit price gains. Lower energy expenses and cost of equipment, such as steel needed to grind copper ore, point to declining production costs in 2015. Also, as the dollar strengthens, marginal costs in local currency will decrease.

Goldman Sachs analysts estimate marginal production cost will fall to $5,600-6,300 a tonne next year. For commodities with small surplus, such as copper, the price tends to trade around the marginal operating cost of production.

Goldman Sachs has lowered its price estimate for 2015 to $6,217 a tonne, from $6,400 a tonne predicted earlier. It also cautions that prices could fall to an average $5,600 a tonne if China’s State Reserve Bureau, which is estimated to buy 200,000 tonnes in 2015, stops buying. BNP Paribas, however, believes that a fall below $6,000 a tonne might trigger large-scale buying from China coupled with hefty cutback from copper producers. So, it estimates that copper prices may remain under pressure and hover around the March 2014 low of $6,320 a tonne but not trade below $6,000 a tonne.

Stable Indian outlook

Copper prices in India largely track the international price trend. Based on data from the Indian Bureau of Mines, ore output has remained around three million tonnes level a year in the last 10 years. India’s copper production capacity averaged 9,50,000 tonnes per annum over the last few years.

Copper demand in the country was around 500,000-600,000 tonnes a year in the past. India exports refined copper and ranks 11th among exporting nations. The country’s copper consumption is expected to be robust at over 5 per cent. Still, the country’s annual per capita copper consumption is quite low — at around a tenth of 6 kg per person in China. India only accounts for 2 per cent of global copper consumption and local demand does not impact global price trends.

Any weakness in the rupee would help stabilise local copper prices. And given the strength in dollar and expected drop in Indian interest rates, local prices are likely to see less downside risk compared with global downside risk.

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