BEIJING (Commodity Online): Commodities are on a surge these days. Led by gold that is running to touch $1,100 per ounce soon, commodities have turned out to be the hottest investment sectors for global investors. Trying to catch up with gold is copper, leading the base metals complex.
Copper, the hottest among the base metals, is controlled mostly by China. How far can copper price go? Will copper price crash? Following is an analysis on copper by Fortis Metals Monthly.
The short - termist view of where copper is at today needs no scientific genius - it's all down to China. This year China has been on a copper feeding-frenzy. Its imports of refined copper swelled to almost 2.3 Mt in the first eight months of 2009, 166% higher than the same period in 2008 and only 660,000t lower than imported during the whole of 2007 and 2008 combined.
Between September 2008 and August 2009, China imported a staggering 2.89 Mt of refined copper - more than 16% of global consumption. Without that, the price would be dragging along at around $4,000/t. It is astonishing that, in what is generally agreed to be the worst post-1945 recession, no copper producer or mine has been forced out of business as a consequence of insupportably low metal prices.
Perhaps equally staggering is that, while China has been buying up copper from around the world, it has also stepped up its own copper output. Its refined copper production during January-August 2008 was 2.46 Mt; during the same period this year that output rose to 2.63 Mt, with much higher imports of copper concentrate imports and of domestic concentrate production, which were up by 19% and 6%, respectively, to 4.13 Mt and 0.64 Mt. Its refined copper production capacity has, over the same eight months, risen by 0.65 Mt/y, year-on-year.
But imports and refined production should be put into a context of scarcity of scrap copper and real demand. China's imports of scrap copper were 2.58 Mt in the first eight months of 2009, down a massive 1.3 Mt from a year ago. Since copper scrap is extremely price sensitive, and supplies generally dwindle rapidly on lower prices, China's semi-finished copper fabricators were forced to augment their working stocks with more expensive refined copper for much of 1H 2009.
This trend reversed direction in July and August, as higher copper prices caused scrap supplies to soar to 448,258t and 392,121t, respectively, while refined imports fell month-on-month. In our view, the dynamics of scrap supply were a key reason behind the rise in China's record refined imports, but other factors also played a part.
There are some good explanations, not the least of which is the positive arbitrage trade; the higher Shanghai price over that of LME prices for much of 1H 2009 certainly helped boost imports. There is also a good medium-term explanation, that of China's $585bn infrastructure-focused stimulus package, which will inevitably soak up large volumes of copper.
The other huge imponderable underlying the strong copper price is China's restocking - and what the ultimate aim of that restocking might be. The size of Chinese restocking has been much debated, with estimates of as much as 1.2 Mt, excluding stocks accumulated by the State Reserves Bureau (SRB), which amount to at least 235,000t. The exact amounts remain uncertain, largely because Chinese copper consumption has been difficult to quantify, due to lower scrap supplies. Along with the SRB's restocking there are also stocks held in bonded warehouses, estimated to be at least 150,000t. On top of that it has been widely claimed that as much as 800,000t of refined copper is now being held in other off-market stocks, such as those of private investors and merchant traders. It is this last figure that is the most difficult to pin down or accurately assess - none of this copper has any form of official or structured reporting other than anecdotes.
We are skeptical that as much as 800,000t of copper is actually being held in this form of off-market stocks. We base this opinion on two factors. The first is the fact that copper scrap supply had deteriorated so sharply, that the dearth of scrap has meant that smelters have had to find replacement stocks in the form of refined copper. Also, by taking China's copper product's production as a proxy for real consumption, we get a much lower figure. China's output rate for copper products in 1H 2009 was 6.1 Mt, a massive 1 Mt higher, or 19%, than during the same period of 2008.
By adding imports of unwrought copper and copper products (including refined copper, copper alloy, copper products and copper anode) to refined production, and assuming the substitution of about 400,000t-600,000t of refined copper for copper scrap, then we estimate that China's copper restocking, outside of the SRB and bonded warehouses, falls to between 400,000t-650,000t. Including the copper held by the SRB and bonded warehouse inventories this brings the amount of copper held to around 0.8 Mt-1 Mt. While this is still significant, it is not as high as some market commentators suggest.
So what has changed? Chinese imports of refined copper have lost some of their momentum, with month-on-month declines in both July and August. The latest September import data for unwrought copper and copper products was however 399,052t, up 22.7% from August, although still 2% less than July. Nevertheless, the strong levels of imports in September suggest that, even with copper prices at their current high level, Chinese demand has been robust, and may remain so, even though the arbitrage window has been closed since late July. This can only be price supportive, especially at a time when the expected recovery in OECD demand has so far disappointed.
Will this level of Chinese copper imports be sustained for the rest of this year? It's not impossible, but higher domestic refined output, as implied by the 17.4% rise in production and imports of copper concentrate in the first eight months of 2009, to 4.78 Mt, might make inroads into these imports. China's copper imports in Q4 2009 are, in our view, unlikely to match levels seen in May and June. As we end 2009 and enter 2010, the trend for copper prices will increasingly be determined by the shape of economic recovery in the OECD.
Western recovery essential
We have argued consistently that the copper price rally has overshot underlying fundamentals in 2009. We base this on the premise that at some point Chinese demand will slip below the recent record levels, and that when this happens the price would correct. However, there remains the chance that Chinese demand will stay strong until OECD demand picks up.
Are we at that crossroads yet? Perhaps not and in any case it remains unclear right now that the West's recovery is properly underway. If Western demand recovery continues to disappoint, as Chinese demand stabilizes, then the copper price could revert to $5,000/t levels. Should signals remain mixed, as they currently are, then the wall of money waiting to pounce on weaker prices will ensure the copper price remains close to $6,000/t.
So where are we at the moment? The US is the dominant focus for signs of recovery, and rightly so; the EU 15, which accounts for about 20% of global copper consumption, is also important, but the lead will come from the US. It accounted for about 12% of global copper consumption in 2008, but is projected to consume about 23% less copper in 2009, at current demand levels.
Yet because the level of destalking during Q4 2008 and Q1 2009 was so fierce, once signs of demand rise the restocking phase is likely to be sharp. With much of the world's excess copper stocks currently sitting in China, US restocking will tighten the market as we expect demand will outpace supply initially.
However, US economic recovery to date has been a bit of a damp squib. Until consumer's spending power and positive sentiment returns, then demand will remain much lower than that seen over the past few years. But for that to happen unemployment will need to turn a corner and begin to fall. This is not yet on the horizon.
US initial jobless claims do seem to have peaked, but at more than 500,000 each week for the past year the total unemployment rate will almost certainly peak above 10% in 2010. As a result, US household income and consumption are unlikely to rise fast enough to ensure a strong and self-sustaining recovery of the US economy, and this will impede recovery in the EU and other mature economies.
