Copper to gain on supply constraints

NAVEEN MATHUR | Updated on December 16, 2014 Published on December 16, 2014


Naveen Mathur

The metal may inch towards $6,950/tonne

Base metals have witnessed a lot of ups and downs this year due to geo-political tensions arising out Russia -Ukraine standoff in the first half, followed by faltering growth in China during the second half.

Although efforts have been made by the People’s Bank of China, they have not been enough to contain the falling trend in base metals.

In addition to this, the euro zone, possibly, slipping into a third recession since the resurfacing of financial crisis, has been a matter of concern.

The only saving grace for the industrial metal this year has been a rebound in the US economy, which has supported demand and provided some respite.

Let us see how copper prices have behaved this year and how it will behave in the coming months.

Copper, an indicator of the strength of the global economy, has been the worst performer in the base metals space. From the start of the year till now, prices have tumbled after weak economic data from EU and China.

Besides, reports of a slew of scams from China have led to demand outlook being threatened from the biggest consumers.

Moreover, Newmont and Freeport mines, which account for 97 per cent of Indonesia’s copper output, have resumed exports of copper concentrate after the mining giants agreed to pay a revised duty of 7.5 per cent on their exports, thereby adding to the supply.

Amidst these concerns, the International Copper Study Group has forecast a lower deficit of 270,000 tonnes in copper before it swings into surplus next year.

Adding to demand concerns, Japan, the fourth largest consumer, unexpectedly sank into recession in the three months through September and reignited concerns after the US and China also posted weak numbers in the manufacturing sector.

In case of inventories, China’s State Reserves Bureau continues to place orders for 150,000 to 200,000 tonnes of copper cathode after buying 200,000 tonnes of copper in March and April 2014, when the red metal was at its weakest price point in years.

The supply side will face constraints in the coming months as BHP Billiton has flagged lower output at Escondida, world’s biggest copper mine, because of declining ore grade. Rio Tinto also said that its production of the metal will drop to 500,000-535,000 tonnes in 2015 from 615,000 tonnes, mainly due to rehabilitation work at its Kennecott operation in Utah.

Copper mines in Peru and Indonesia, too, have been shut due to strikes, putting a cap on rising supply and providing a temporary respite to prices.After a string of weak economic data, expectations of monetary stimulus from China to boost growth have been mounting. It will be a supportive factor for copper.

However, sharp upside will be capped as Chinese copper demand is expected to rise only 4.5 per cent next year to 11.2 million tonnes compared with a 9 per cent growth this year.

This is due to a tight scrap market and drop in the use of copper in view of the loan collateral warehousing scams. Going forward, the red metal is likely to trend higher on potential supply disruptions across the globe.

From a 2-3 months perspective, copper prices in the international markets (CMP: $6,400/tonne) might inch higher towards $6,950, while MCX copper (CMP: ₹414/kg) can possibly head higher towards ₹440.

The writer is Associate Director – Commodities & Currencies, Angel Broking Pvt. Ltd. Views are personal.

Published on December 16, 2014
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