Copper Commodity 2012 Prices Rise

Copper commodity prices 2012, despite finally reaching an agreement with management, workers at Freeport McMoRan's giant Grasberg mine further delayed their return to work after a three month strike that the company says is costing it roughly 2m pounds of copper production daily.

While an extreme case, the situation at Grasberg, the world's second largest copper mine, is not the only setback facing the supply side of the global copper market.

As Macquarie's commodities research team pointed out last week, "Global copper mine output has continually disappointed forecasts and, more importantly, market needs over a number of years now, despite the strong financial incentive not only from high copper prices but also high by-product prices and a fall in processing fees paid by miners to smelters."

It adds that while there is no one consistently dominant cause of these losses, "the cumulative impact has been significant year-in and year-out since the middle of the last decade."

Despite the continual disappointment, it is worth pointing out, as UBS does in a recent report that global copper supply is forecast to lift 4.7% to 20.6Mt in 2012, driven by mine supply growth of +9.9% in Chile (6.0Mt), +11% from the US (1.3Mt), +10% from China (1.5Mt) and +13.7% from Zambia (0.96Mt).

But, the group adds, "unions are strongly incentivized to seek higher wages in 2012, given the high profits being generated among the producers" which it says could lead to further strikes in the sector and frustrated supply growth.

While not particularly novel, these supply constraints have served to help mute concerns on the demand side of the market that have seen prices of the red metal fall strongly as concerns have risen about slowing demand not only in the West but also in China.

Continued concerns about the state of the Euro zone and, in particular, the longer term impact of the crisis on the region's banking sector and its impact on liquidity have seen prices in many of the industrial metals decline, especially as demand from China has weakened.

As Standard Bank pointed out recently, "Access to credit relates to tight domestic monetary policy. But it also relates to the reduction in credit extension of especially European banks to many Chinese firms. Furthermore, the European problems are creating great uncertainty for businesses in China which is exacerbated by (a) a decline in export orders from Europe; and (b) commodities being diverted from Europe to China as European demand falter. As one metal importer put it "Chinese businesses are more concerned about Europe's debt problem than Europeans themselves".

Looking out to the first quarter of 2012, however, some analysts believe that this slowdown in Chinese demand could reverse.



According to UBS, "Of all the base metals, copper features the most robust, short-term fundamentals. For even with a subdued economic outlook, China is short copper. This was highlighted by how import flows jumped in recent months, following only a modest improvement in China's general credit liquidity."

It adds, that while it expects copper's price to lift going into 2012, in line with this restocking event, there remain three key risks to the price of the metal.

The first of these is that the Chinese New Year may result in an easing of purchases in December and January. The second is the demand gap between private and government-led construction.

"Tao Wang, UBS China economist, believes government-led social housing programmes will offset trade weakness in private housing construction (private falls 15%; social housing floor-space lifts 50%). But we highlight a risk that the timing of the two trade shifts may be out sufficiently to create a short-term weakness in copper's demand and price," the bank writes.

And, finally, it points out that the narrowing of the SHFE:LME price differential since October has undermined the trader incentive to import metal, which may lead to a bearish build in metal inventories ex-China."

But, while these risks are significant, the bank believes that they are only likely to occur in the weeks leading up to the Chinese New Year. "Beyond that, we see a conventional seasonal restock (from Feb- 12) completely offsetting these risks, with copper's price strengthening throughout 1Q12.

Further out, however, the Bank, like Macquarie, is conscious of the supply-side situation but, remains more positive on the markets, ability to deliver new production.

"A genuine supply response to copper's recent, high price is underway, mainly out of Africa and South America. The DRC and Zambia are together expected to deliver new supply at a rate that will weigh on the price over the longer term."