Copper stockpiles will fall to a record low in the third quarter as demand outpaces supply and China, the world’s biggest consumer of the metal, resumes buying, according to Barclays Capital.
“We think the market is in such a large deficit this year that sometime in the third quarter, copper stocks are going to hit the lowest level they’ve ever been,” Kevin Norrish, a managing director at Barclays, told reporters in London yesterday.
Inventories monitored by the London Metal Exchange are up 15 percent this year to the highest level since July, daily LME figures show. Demand will exceed supply by 889,000 metric tons this year, Barclays estimated in a March 15 report, more than projections of 400,000 tons from Royal Bank of Scotland Group Plc and 371,000 tons from VM Group and ABN Amro Bank NV.
“We’ve not changed our views,” Norrish said. “We are still seeing an incredibly tight market. I think what’s going on in China is that there has been a little bit of a pullback because prices are so high.”
Imports of refined copper into China slumped to a two-year low of 158,185 tons in February, customs figures showed on March 21. LME copper rose to a record $10,190 a ton on Feb. 15.
Norrish cited “strong buying interest” from China last week, when prices fell below $9,000 a ton. The Asian nation, which represents about 45 percent of global copper demand, will likely resume purchases “before too long,” he said.
“One way or another, China has to buy copper,” Norrish said. “They can’t find substitutes.”
LME prices dropped as low as $8,944.50 a ton last week. Copper for three-month delivery on the exchange traded at $9,648 at 9:36 a.m. London time today. The metal is up 0.5 percent this year and has averaged about $9,634 so far in 2011, compared with the annual average of $11,500 predicted by Barclays in the March 15 report.
The first exchange-traded products backed by industrial metals are unlikely to win over investors in the same way that precious-metals funds did, according to Norrish. Industrial- metals ETPs have higher storage fees, he said.
Investors in industrial-metals ETPs also won’t benefit from backwardation in the same way as financial investors, Norrish said. Backwardation is a market structure in which metal for nearby delivery trades above later-dated contracts, potentially signaling concern about supply.
“If the copper market develops in the way we think it would, there will be an enormous backwardation,” Norrish said. “In the backwardation, you’d benefit having financial exposure to copper, but you won’t benefit in the same way holding physically backed exchange-traded product, because you won’t be rolling your position down the futures curve. You will just be paying your storage fees for that physical copper.”
ETF Securities Ltd. introduced the first ETPs holding physical copper, nickel and tin in December. ETFS Physical Copper held 1,599.99 tons of the metal as of today, according to the company. Holdings rose to 2,219 tons on Feb. 2.
JPMorgan Chase & Co. and BlackRock Inc. have said they may also open ETPs backed by industrial metals. ETF Securities said March 21 it would delay the introduction of products backed by aluminum, lead and zinc.
“If you look at ones that have been launched so far, they’ve definitely underperformed market expectations,” Norrish said of industrial-metals ETPs. “So there is a real question mark about their raison d’etre.”
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