Copper has potential to rebound to $10,000/t; market seen in deficit

Copper market has come under intense pressure following concerns over global economic growth. Prices have dipped below the psychological $9,000 a tonne.

At the same time, experts believe the metal's prices have overshot to the downside and are likely to recover soon given the tight market fundamentals.

The global copper market is still in a state of deficit, despite slowdown in Chinese apparent usage.

The apparent global refined copper balance for the first five months of 2011 indicates a production deficit of 1.46 lakh tonnes compared with production deficit of 1.62 lakh tonnes during the same period in 2010, the International Copper Study Group (ICSG) said in its latest report.

Although copper usage in Japan, the EU, the US and the Russian Federation increased so far this year resulting in a modest one per cent apparent growth, it was largely offset by an eight per cent decline in Chinese apparent usage, ICSG pointed out. .

On the other hand, although world mine production grew by around 1.6 per cent in the first five months of 2011, production at three of the four world's leading producers (Chile, Peru and the US) that combined represent one-half of the world's production was down by an aggregate 1.1 per cent which was more than neutralised by China, currently the world's second largest producer, with a robust 13 per cent increase so far this year.

Stocks up

As of end-July, copper stocks at the major metals exchanges (LME, COMEX and SHFE) totalled 6.58 lakh tonnes, an increase of close to 90,000 tonnes from stocks held at the end of last year, ICSG reported.

Stocks were up at the three exchanges compared with June levels.

However, on an annual basis, global copper market demand supply balance is projected to be in the negative territory at well over 6,00,000 tonnes.

Way forward

What's the way forward for the global copper market? How will it behave next four months or so?

It is abundantly clear that the macroeconomic environment poses the biggest challenge to recovery. Any further downgrades to the growth outlook for developed markets will continue to pressure this base metal.

Importantly, however, what happens in China is critical. After all, the Asian major accounts for as much as 40 per cent of the global copper consumption.

Without doubt, emerging economies have significantly contributed to copper consumption growth in recent years.

So, according to experts, whether China has hard or soft landing will be most significant factor for copper.

Chinese surprise

Many believe China's destocking cycle is coming to an end.

It is also interesting that the Chinese would return to the world market at the current relatively low price levels to replenish their inventory. That single factor can potentially support prices.

China's July import data surprised many by registering a month on month increase of 9.5 per cent.

On the whole, there is strong possibility of world copper prices recovering in the coming months, boosted by Chinese purchases for restocking.

It may come as no surprise if prices recover to five-digits. It may touch $10,000 a tonne sooner than many can imagine.

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