The biggest slump in copper inventories in six years is compounding shortages as prices head toward record highs, making the metal a top pick for Goldman Sachs Group Inc. and Morgan Stanley.
Demand will outpace supply by 367,500 metric tons next year, enough for wires, pipes and appliances in about 1.8 million U.S. homes, according to the median forecast of 12 analysts surveyed by Bloomberg. Stockpiles may drop to an all-time low of less than one week’s usage, said Michael Widmer, a London-based metals analyst at Bank of America Merrill Lynch. Global exchange inventories have dropped 22 percent this year, heading for the largest slide since 2004, data compiled by Bloomberg show.
Prices advanced 35 percent since June 30 even as the International Monetary Fund predicted slower world growth, U.S. unemployment stuck near its highest level in more than a quarter century and China, which uses two in every five tons of copper, curbed lending and raised interest rates. Now, banks from Credit Suisse Group to Barclays Capital are predicting higher prices, with the median in the Bloomberg survey at a record average of $8,542 a ton for 2011, 15 percent more than this year.
“Copper is the most attractive” of the base metals, said Ian Henderson, who manages about $8 billion in assets at JPMorgan Chase & Co. in London, including shares of Freeport-McMoRan Copper & Gold Inc. and BHP Billiton Ltd., the second and third-biggest miners. “I don’t expect any decline in copper demand in 2011 and there is little in the way of new mines coming on stream.”
Prices climbed 19 percent this year, reaching $8,802.50 a ton on the London Metal Exchange today. That compares with a 6.6 percent advance in the MSCI World Index of equities, a 6.9 percent return on Treasuries and a 16 percent gain for the Standard & Poor’s GSCI Index of 24 raw-material futures. Prices reached a record $8,966 a ton on Nov. 11.
Demand for the metal, used in everything from smart phones to brake pads, will increase 4.2 percent next year, compared with a 2.6 percent gain in production, Barclays Capital said in a report Nov. 11. Supplies fell 363,000 tons short of demand in the first eight months of this year, the Lisbon-based International Copper Study Group said in a report Nov. 23.
Mining companies have failed to keep pace with demand because new reserves are getting harder to find and the quality of ore is declining, meaning less metal is extracted from each ton of earth. Average grades declined to about 1.1 percent this year from 1.6 percent in 1990, according to Guildford, England-based researcher Brook Hunt, a Wood Mackenzie company.
Production at Escondida, the world’s largest copper mine, will drop as much as 10 percent in the 12 months ending in June because of lower grades, Melbourne-based BHP Billiton, the largest shareholder, said in a statement Aug. 25.
Freeport-McMoRan, the largest listed producer, said Oct. 21 that its copper sales from North America would drop to 1.1 billion pounds this year from 1.2 billion pounds in 2009. Sales from Indonesia will probably decline to 1.2 billion pounds from 1.4 billion, the Phoenix-based company said.
“The major copper reserves that are being produced today come from 100 year-old mines, with few exceptions,” Freeport Chairman James R. Moffett said in a conference call on Nov. 17.
Analysts’ forecasts for shortages may not yet be reflected in futures markets. Copper for delivery in December 2011 traded at $8,555 on Dec. 3 on the LME, 1.9 percent below than the benchmark contract for delivery in three months.
Goldman predicts prices of $11,000 by then and buying the December 2011 contract is one of its seven recommendations in commodities, according to a report Dec. 1.
The forecast gains could be stunted by slowing growth. Prices slumped 7.7 percent in three days last month on concern China’s steps to control inflation may curb demand for metals and that Ireland would need a banking bailout.
Prices now may also be skewed by who owns metal. One unidentified company held 50 percent to 79 percent of the LME’s deliverable stockpiles as of Dec. 1, bourse data show. Buyers that day paid the largest premium in two years for immediate supply, relative to the three-month contract. Deliverable inventories total 324,375 tons, the exchange said Dec. 6.
Record prices could encourage users to substitute cheaper materials. Global consumption may be 100,000 tons less than expected in 2011, and 250,000 tons below predictions in 2012, because of replacement by plastics in plumbing and aluminum alloys in air-conditioners, Credit Suisse said Oct. 20.
Substitution may take out 3 percent of demand this year and next, according to London-based Rio Tinto Group. New uses in electric and hybrid cars should make up for some of that, Andrew Harding, chief executive officer of Rio’s copper business, said Nov. 26. The average North American car contains about 23 kilograms (51 pounds), while an electric car uses about 75 kilograms, he said.
The tripling of prices since December 2008 is also spurring use of scrap metal, alleviating shortages signaled by this year’s 22 percent drop in stockpiles monitored by exchanges in London, Shanghai and New York. The supply of metal from wires and electronic goods jumped 25 percent in the first eight months, the International Copper Study Group reported in November.
The biggest threats to higher prices are China tightening its monetary policy and a worsening European debt crisis, said Bank of America Merrill Lynch’s Widmer, whose March prediction for this year’s average price is accurate to within 2 percent.
China may raise bank reserve requirements to counter capital inflows and a possible jump in lending at the start of 2011, Li Daokui, an adviser to the central bank, said Dec. 3. The bank pushed the one-year lending rate to 5.56 percent in October, the first increase since 2007.
Still, manufacturing grew at a faster pace for a fourth straight month in November, according to the nation’s logistics federation. China’s economy will expand 9 percent in 2011, compared with 10 percent this year, according to the median of 18 economists surveyed by Bloomberg. That would still be more than three times the speed of the U.S., the second-biggest copper user, the survey shows.
Consumption in China, India, Brazil and the Middle East will expand at an average annual rate of 7 percent per capita through 2015, according to Barclays Capital.
“Where is all the new copper going to come from?” said Tom Patton, chief executive officer of Quaterra Resources Inc., a Vancouver-based company developing mines in North America. “New deposits take 10 to 15 years to start up.”
Aurubis AG, Europe’s largest smelter, is also predicting higher demand next year.
“We presently see a very positive order flow for next year,” Bernd Drouven, chief executive officer of the Hamburg-based company, said by e-mail. “Every copper price dip is recognized by customers as an opportunity for new orders.”
Demand from Asia helped Santiago-based Codelco, the biggest producer, increase the surcharge on sales to China next year by 35 percent, more than the 23 percent increase for Europe, industry officials said last month. Buyers pay the fee on top of the price of LME copper for immediate delivery.
The gain is driving shares of mining companies. Freeport-McMoRan climbed 38 percent in New York trading this year, beating the 9.7 percent gain the S&P 500 Index.
Demand may also be boosted if JPMorgan, BlackRock Inc. and ETF Securities Ltd. start exchange-traded products backed by the metal. Such funds could hold as much as 250,000 tons, Aurubis said in a report Nov. 15. Similar products backed by gold accumulated 2,098 tons since they started in 2003, equal to nine years of U.S. mine output.
“The real story is metals and we’ve dubbed this the metals decade,” Mari Kooi, chief executive officer of Wolf Asset Management International LLC, said at the Bloomberg Link Hedge Fund and Investor Briefing in New York on Dec. 2. “What we have is a set up of shortages in the metals.”