Low inventory, supply disruptions & rising demand behind buoyancy

G. Chandrashekhar

Breaking the ceiling

Despite rising

prices, copper supplies may not arrive quickly enough.

Market moving

towards deficit for the current year.

Zinc prices

have actually reacted earlier than many expected

Mumbai, April 18

Copper market is expected to continue to witness strong prices for at least three more years, thanks to extremely low inventory, supply disruptions helping to maintain tightness and continuing robust demand.

A large number of supply disruptions due to strikes, mine production problems, equipment delays and lower ore grades are cited as factors for the bullish view on prices. As a result, the refined market could swing into deficit in the current year.

Despite rising prices, supplies may not arrive quickly enough to contain price spikes. However, a sharp slowdown in global economic growth and concomitant slowdown in copper demand growth can potentially lead the market into a state of surplus. There is no sign as yet of that happening, though.

Macquarie forecast

Analysts at Macquarie Research Commodities have revised their price forecast upward for 2006, 2007 and 2008, even as the market had smashed through their previous forecast made early February. Their calculations suggest that market stocks are unlikely to return to reasonably comfortable levels before 2010.

Currently, market stocks of copper cover 2.3 weeks of world consumption which could rise gradually over the next three years and reach 4.4 weeks of consumption by 2010.

Looking at projected refined production (17.825 million tonnes) and consumption (17.965 mt) numbers, the market is moving into deficit in the current year, analysts asserted.

As a result Macquarie Research has revised its forecast average copper prices for 2006 up to $5,590 a tonne (from earlier $4,850).


In 2007, demand/supply balance may move into a small surplus (1.23 lakh tonnes), a quantity that does not suggest much downward pressure on prices. Should production disruptions persist or worsen, the situation could change. Therefore, the forecast price for 2007 is revised to $5,208/tonne, up from $3,527, analysts said.

Zinc prices

In the current year, zinc prices have actually reacted earlier than many expected. For the past six months or so, prices have been above the levels suggested by price/inventory relationship.

Refined zinc supply-demand balance suggests that the market could in a state of deficit of over 3.5 lakh tonnes, with total supply forecast at 10.737 mt and total consumption at 11.095 mt in 2006. Deficit for the year is higher than that of last year's 2.87 lakh tonnes. As the market is looking ahead to the tightness which is looming for later part of the year, prices have been rather firm. "We continue to expect virtually all of the LME zinc stocks to be run down by the end of the year, and the zinc market to be displaying all the signs of a shortage market, including prices moving to record highs," commented a Macquarie analyst.

LME cash price

The expert forecast that LME cash price for zinc during 2006 could well move above $1.40 per pound equivalent to $3,086 per tonne in the second half of the year.

In 2007, the deficit is seen substantially smaller but stocks would have reached one of the recent low levels, creating conditions for greater price rise.

(This article was published in the Business Line print edition dated April 19, 2006)
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