The Hindu Business Line : Global copper market in fragile balance

Mumbai, July 31 What direction will copper prices take in the second half of the year? This is a question engaging market participants – producers, consumers and investors alike.

In the LME cash market, the closing price as on July 25 was $ 8,184 a tonne and LME three month was weaker at $7,956 a tonne. Prices have been easing last few weeks. The latest assessment of global copper supply and demand till April 2008 made by International Copper Study Group suggested that world copper demand was flat year-on-year over the first four months.

Deficit market

Despite weakness in demand, the data showed copper market in deficit.

This is attributable to lack of growth of copper mine supply. In the first four months of the year, the deficit totalled around 108,000 tonnes.

“But after making seasonal adjustments (allowing for seasonal demand strength in the early part of the year), that deficit shrinks to 34,000 tonnes,” remarked an analyst with Macquarie Research.

Experts are debating whether the world copper market is in small surplus (with non-reported stock-building occurring) or small deficit (as reflected in the reported stock changes).

Sluggish demand

Given the current fundamentals, it is clear the market is in fine balance. While inventories are running low, world base metals demand in general and copper demand in particular has been weak because of an apparent slowdown in industrial economies.

There is a positive correlation between economic growth and metals consumption. Importantly, China which is a mover and shaker of the base metals market has displayed lack of buying interest. This is seen limiting the upside potential of copper prices. Supply side constraints too can play a part in impacting the market as had happened in the past.

In a commodity market, which is tightly balanced, even a small change in either demand or supply or both will have a disproportionately large impact on market prices. So, in the near-term, copper prices could swing either way. Entry of China into the market can alter the picture. However, there is belief that physical supplies should be available given the lacklustre demand from the developed world.

The latest Chinese economic data suggest moderate easing of growth. Tighter monetary policy and slower world economic growth have combined to reduce the scorching pace of China’s growth. But the macro-economic fundamentals continue to remain strong suggesting a continued strong consumption bias.

In sum, the copper market surplus, if any, is indeed small. At the same time, stocks are low. It may be safe to conclude that market will remain sensitive to changing economic and market conditions.

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