The Hindu Business Line : Slowdown in copper demand; supply still tight

Supply deficit in Jan-Nov 2005 put at 1.54 lakh tonnes
But deficit down from 9.72 lakh tonnes during the year-ago period
Sharp declines in futures price

Mumbai , Feb. 20

, THE copper market was roughly balanced at a small deficit of 1.54-lakh tonnes in the first 11 months of 2005, with refined production touching 15 million tonnes, compared to consumption at 15.1 mt, the International Copper Study Group (ICSG) said in its latest assessment released late last week.

The estimated deficit disclosed a substantial reduction on 9.72-lakh tonnes reported for the same period in 2004; but still more than enough to leave the copper market chronically tight, experts commented.

The ICSG data continue to underline how weak global copper demand was last year, due to a combination of slowing industrial production growth and heavy destocking by consumers. Usage in the US was down 6.4 per cent year-on-year in the first 11 months and in Europe 7.7 per cent. China and Eastern Europe were the only regions to show positive growth.

Last Friday, metals bounced back in the US market in continued volatile trading as investors returned to the market ahead of a long weekend in the US. Copper stood at $ 4,919 a tonne, rising 2.3 per cent over the day.

Futures prices fall: Copper contracts show steep declines in futures prices. This can be explained by the current exceptional market tightness that puts upward pressure on spot prices. What is remarkable is that the market is not more heavily backwardated.

Normally when cash prices are very high, cash to three months prices move into extremely steep backwardation, and the far forward prices trend down towards `normal' levels, an analyst commented adding that for the nearby prices to be actually in contango at the spot price levels was remarkable.

It is possibly the reflection of massive amount of investment fund money placed in commodity index funds. These funds are invested in nearby futures which are then rolled forward by one month each month. This rolling (selling a nearby position and buying an equivalent position further forward) could be effectively depressing the backwardation despite severe tightness in physical availability.