Looming Copper Surplus Contracting as Mining FailsMaria Kolesnikova and Agnieszka Troszkiewicz
Analysts are slashing predictions for the first copper glut in four years as producers from Chile to Indonesia contend with aging mines and strikes at a time of record demand.
The global surplus will total 18,500 metric tons, according to the median of 22 analyst estimates compiled by Bloomberg, 85 percent less than a January forecast of 124,000 tons. Barclays Plc expects shortages in the first half of next year and Morgan Stanley and JPMorgan Chase & Co. anticipate an annual deficit. Prices will rally as much as 14 percent to $8,700 a ton by Dec. 31, the median in a survey of 15 analysts shows.
Mining companies on average are processing about 15 percent more ore than they were in 2000 to extract the same amount of metal, according to Macquarie Group Ltd. Freeport-McMoRan Copper & Gold Inc. shut Grasberg, site of the world’s largest reserves, for two weeks in the first quarter after violent protests, following a three-month strike in 2011. Demand growth will accelerate to 4.7 percent next year from 1.5 percent in 2012, Morgan Stanley estimates.
“It’s really a matter of scarcity in copper, with mined supply lagging behind expectations,” said Thomas Benedix, a Stuttgart, Germany-based metals analyst at Tiberius Group, which manages about $2.1 billion of assets. “At the start of the year people were expecting that the supply side could really start delivering on their targets, and now it’s not going to happen.”
Copper fell 17 percent in the four months to June 8 on the London Metal Exchange, 3 percentage points less than the common definition of a bear market. It’s since rallied 4.8 percent to $7,643.75, for an annual gain of 0.6 percent, beating the 1.3 percent drop in the Standard & Poor’s GSCI gauge of 24 raw materials. The MSCI All-Country World Index of equities rose 4.5 percent and Treasuries returned 2.6 percent, a Bank of America Corp. index shows.
While the International Copper Study Group forecasts mine output will expand 5.1 percent this year and 7.6 percent in 2013, production has missed the Lisbon-based group’s initial forecasts in each of the past five years, data compiled by Bloomberg show.
Deutsche Bank AG cut its 2013 surplus forecast to 260,000 tons from 300,000 tons on July 3 and JPMorgan is now predicting a 295,000-ton shortfall, compared with a January projection for a 259,000-ton glut. Bank of America Merrill Lynch said July 9 it expects a 7,000-ton surplus from 120,000 tons forecast in April. Barclays puts the last surplus in 2009.
Morgan Stanley’s prediction for additional consumption of almost 1 million tons next year is more than Santiago-based Codelco, the world’s largest producer, can extract from Codelco Norte, its biggest source of copper, according to data compiled by Bloomberg.
The changing forecasts have yet to be recognized by hedge funds. Speculators more than doubled their net-short position, or bets on declining prices, in the week ended July 10, U.S. Commodity Futures Trading Commission data show.
The funds have been bearish since the end of May, the longest streak since January, on mounting concern that central banks and other policy makers will fail to shore up growth. About $4.6 trillion was erased from the value of global equities since the end of March, data compiled by Bloomberg show. Copper buyers are delaying purchases because Europe’s debt crisis may derail the global economy, Codelco Chief Executive Officer Thomas Keller said in an interview June 6.
A purchasing managers’ index for China, the biggest copper consumer, reached a seven-month low in June, HSBC Holdings Plc and Markit Economics said July 2. U.S. manufacturing shrank in June for the first time since July 2009, the Institute for Supply Management reported the same day. Service industries and factory output in the 17-nation euro area contracted for a fifth consecutive month, Markit reported July 4.
“Things have definitely worsened in the past few months,” said Dan Smith, a commodities analyst at Standard Chartered Plc in London. “In the short term, the economic picture is going to get weaker and that will affect the copper market. Sentiment is really what drives this stuff.”
The European Central Bank reduced interest rates to a record low on July 5 and the Bank of England announced the resumption of bond purchases on the same day. Federal Reserve policy makers are scheduled to announce a rate decision Aug. 1.
China cut rates in June and this month and reduced reserve requirements for banks three times since November. The stimulus may boost copper demand later this year, according to Jeremy Baker, who manages the $800-million Vontobel Belvista Commodity Fund in Zurich. The country will use 6 percent more copper next year, almost twice the pace of the global expansion, Barclays estimates. The total amount of construction across China is equivalent to building a city the size of Chicago every year, JPMorgan Asset Management said in a report in May.
Mining companies will struggle to keep up because the metal content of ore is declining, new deposits are getting harder to find and wages and fuel bills are increasing. Costs are rising by as much as 10 percent a year for some producers, Macquarie said. The average ton of ore contains about 1.1 percent copper, compared with more than 1.3 percent in 2000, it estimates.
Codelco’s output for the first five months of this year was 7.5 percent lower than a year earlier and Rio Tinto Group’s first-half production also slid 7.5 percent. Its Bingham Canyon open pit mine in Utah, the London-based company’s second-biggest copper operation, is more than 100 years old and now more than three-quarters of a mile deep. Melbourne-based BHP Billiton Ltd., the world’s biggest mining company, extracted 4 percent less copper in its financial year that ended June 30.
Anglo American Plc and Xstrata Plc reported a 36 percent slump in copper output at their Collahuasi copper mine in northern Chile in the first five months of this year, compared with the same period in 2011, Chilean state copper researcher Cochilco said today.
A rebound in prices would help sustain earnings for the companies as output contracts. Shares of BHP will rise 33 percent to A$40.20 in the next 12 months, the average of 17 analyst estimates compiled by Bloomberg show. The company’s industrial metals unit accounted for 20 percent of sales in the year to June 2011, data compiled by Bloomberg show.
Global stockpiles monitored by the LME fell 32 percent to 253,575 tons this year as inventories tracked by the Comex exchange in New York retreated 44 percent to a three-year low of 49,097 tons. Reserves in bonded warehouses in China stand at about 500,000 tons, from more than 600,000 tons in April, Barclays estimates.
“The issues facing the supply side of the copper market haven’t disappeared overnight,” said Gayle Berry, an analyst at Barclays in London. “The problems like declining ore grades, delays in bringing on new production and so on are not things that happen in one year and disappear.”
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