Red Kite Group, whose metals fund returned more than 50 percent last year, said copper’s outlook has turned positive as refiners are swamped by supplies of mined ore amid prospects for global economies to strengthen.
Production from mines is exceeding output of refined metal and smelter bottlenecks are unlikely to ease for at least the next six months, according to David Lilley, co-founder of the asset manager, which oversees more than $2.3 billion. He also pointed to prospects for global economic growth to accelerate.
Premiums added to the price of copper on the London Metal Exchange were the highest in more than seven years in Europe in November and tripled in the past year in China, the biggest consumer of the metal, according to Metal Bulletin data. Copper stockpiles monitored by exchanges in London, Shanghai and New York are the lowest since October 2012.
“We haven’t seen the refined-copper market this tight since the 2005-06 period,” Lilley said yesterday by telephone from London. “Inventory is low, premiums are high, and there is difficulty in sourcing refined metal.”
The LME’s benchmark contract for delivery in three months fell 7.2 percent last year, the second annual retreat in three. Stocks of copper tracked by the bourse plunged 46 percent from the 2013 high in June by the end of the year. Global economic growth will accelerate to 2.8 percent this year, economist estimates compiled by Bloomberg show.
“There has been a three-year downtrend, which we believe is ending, and copper can start trending higher,” Lilley said. “All industrial metals benefit from good global growth. Copper is the one that has the least inventory, and therefore is the most vulnerable.”
Warehouses in the LME’s global network hold the least copper available for delivery since 2008. Copper stockpiles may continue to shrink in the first quarter, according to Lilley. China’s economy will swell by 7.5 percent this year as expansion in the U.S. speeds up to 2.6 percent and the euro area returns to growth after two years of contraction, according to the estimates.
“Most metals analysts are quite complacent about the fact that you have economic growth in all major regions,” Lilley said. “Coordinated growth is very powerful. At the moment, you have no offsets to growth. This means demand surprises are on the upside, and on the supply side, we just don’t see smelters producing enough refined copper at these price levels.”
Copper for three-month delivery rose 1.1 percent to $7,292.75 a metric ton by 3:48 p.m. on the LME. Prices declined 28 percent since reaching a record $10,190 a metric ton in 2011.
The Red Kite Metals fund returned “just over” 50 percent last year and returns in the Compass and Prospect funds were in the “upper teens,” according to Lilley.
Copper-mine production capacity is forecast to rise by about 8 percent a year on average through 2017, outpacing a 2.5 percent increase in refined output, the International Copper Study Group estimates. Inventories available for delivery in warehouses monitored by the LME are at 122,675 tons, the lowest since July 2008, according to daily data.
Copper is likely to stay in backwardation, when prices rise for future deliveries, for most of the year, Lilley said. The metal for immediate delivery has traded above the three-month contract since Dec. 9, data compiled by Bloomberg show.
Copper held in bonded warehouses in China fell to 550,000 tons at the end of 2013 from 850,000 tons a year earlier, according to a Red Kite presentation. China’s copper demand strengthened in the second half after a slow start and usage jumped 10 percent in 2013, the asset manager estimates.
Output of refined copper may exceed demand by 50,000 to 250,000 tons this year, with the surplus only becoming evident in 2014’s second half, according to Red Kite. A “considerable” slowdown in China would be the only threat to the improved outlook for the metal used in pipes and wiring, and for now there’s no evidence of that, Lilley said.