The untroubled days from the past decade now seem to be well behind the copper industry as it prepares to face a much more challenging and uncertain future. Copper prices were range-bound during May, despite a number of potentially bullish developments. While the bearish fundamentals have been present for quite some time, markets are now taking their time to figure where they want to head eventually. The average LME price for copper was at $8,830 in 2011 to $7,950 for 2012 and has come down further to $7,626 for the current year.

Growth concerns weigh

Growth concerns from leading consuming nations continue to weigh on industrial metals, as the global economies struggle to stand on their feet despite the ultra-loose monetary policies. Manufacturing remains lacklustre across the world and unemployment remains high across US and Eurozone. For the second time this year, IMF trimmed projections for global economic growth, for this year and next.

Mixed statements from the Fed have caused speculation on how soon the Fed would start pulling back which sparked a correction in global equity markets and rising yields, which has influenced copper prices more than the tepid bullish fundamental.

Falling inventories

China, the leading consumer is growing at a dismal pace. The recent numbers show an unexpected weakness in trade and struggling domestic activity, which raises risks of growth falling further in Q2 this year.

Chinese imports of refined copper are down 25 per cent year-on-year till May, showcasing the denting demand.

Inventories in Chinese bonded warehouses are reported to have fallen quite dramatically since April, down to 5 lakh tonnes from 10 lakh tonnes in January, driven by still steady seasonal demand and thin supply of feedstock scrap.

Whereas inventories in the LME warehouses are at their highest since 2003 and are still climbing further, while that on the Shanghai exchange are also just as comfortable, rising in the past three weeks, forming a cushion against any shortages in supply in the near-term.

Meanwhile on the supply side, uncertainty over disruptions at big mines has also kept the markets on the toes. Operations at the Grasberg mine in Indonesia have been shut for the past two months after a deadly tunnel collapse, impacting about 36,000 tonnes of output so far. For every month the mine remains suspended the world loses production of about 42,000 tonnes.

Sentiment turning bearish

Another scheduled start of the large mine in Mongolia awaits final clearance from the government, and Canyon mine in Utah was shut by a landslide in April forcing participants to reanalyse the surplus situation for the year.

A loss of output from Chinese scrap processors who are shutting down their processors as they are battling for supply shortages, also adds to supply shortage.

After a stellar first quarter output from Chile, it seemed as though estimates for 2013 output would have to be revised. However, the above concerns have created a setback.Though landslides, lower ore grades and technical issues will reduce copper mine output this year, the market is still likely to end the year with a sizeable surplus of 1.27 lakh tonnes according to the ICSG. Added to the surplus, the sentiments are turning bearish as global financial markets are more focused on the possible withdrawal of liquidity in the US and the slowing growth in China.

With talks of government approval to restart the Grasberg mine soon will act as another bearish trigger for the tepid market.

Fundamentally things are turning averse for copper and should gradually reflect in price bringing it down to $6,600 a tonne.

Any adverse development on the supply front will provide some support and prices which can inch towards $7,300-7,500 a tonne, but holding on to those levels will not be child’s play.

(The author is Associate Director and Head —Motilal Oswal Commodities. The views are personal)

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