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Feedback from producers was that Chilean refined output is expected to be flat at best and that more concentrate will instead be sold to China, maintaining the 2012 trend.

15 Apr 2013

Commodity Online
Sentiment at this year’s CESCO copper week, in which producers, traders, consumers, investors and analysts get together, was bearish with consensus expectations for surpluses over the next couple of years and a downward trajectory for prices.

“We maintain our view that any Q2 rally in copper prices should be shorted,” Barclays said in a report.

There were no significant downgrades to any specific mine production expectations for this year although risks of further labour disruptions in Chile are fairly high given it is an election year.

Feedback from producers was that Chilean refined output is expected to be flat at best and that more concentrate will instead be sold to China, maintaining the 2012 trend.

Spot demand remains very weak and China is quiet in that respect, with the overwhelming focus of activity in the spot physical market on the incentives to deliver into LME warehouses and the subsequent queues this may cause.

The majority of producers Barclays spoke to were selling their spot material entirely to traders/warehouses directly.

“Subsequently, many we spoke to believe that the copper market is heading in the same direction as aluminium, with the queues-financing-premia dynamic and envisaged tight spot physical market conditions potentially developing over the course of this year as material will be entering LME warehouses much faster than it will come out,”Barclays said in the report.

This is bullish premia, bearish LME flat prices and suggests potential for a bigger contango.

Some tightness in scrap supply has emerged though market participants attributed that more to the dip in pricing than any consistent shortage. Feedback again this year was that more scrap would be needed globally to process lower grade ores and blend out impurities.

There was a strong rhetoric among the producers that we spoke to that future projects are being delayed and cancelled as a result of lower prices. However, few were able to give specific examples of such delays.

Producers will continue with projects that are beyond the point of no return, such as those that are slated to begin production in the next two years, but capital spending retrenchment means boards are re-evaluating projects beyond this point. All of the feedback from our meetings this week reinforced our medium-term bull case for copper prices.

There was also rhetoric that cost support could prevent prices falling much below $7,000/t. However, we believe that is too high. Wood Mackenzie cost data shows marginal C1 cash operating costs of ~$5,000/t.

“Even if these cost estimates are a little on the low side assome producers have reported, it still suggests significant downside from current price levels before cost-driven supply responses are likely to emerge, in our view,” Barclays concluded.


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