Metals Commentary — Global perspective on copper points to bearish market

The past few years have been good ones for copper producers. Prices have remained relatively robust, even as new, large operations began coming on-stream in Chile and elsewhere.

The copper price averaged US$1.33 per lb. in 1995, an increase of US27 cents over 1994, which enabled most producers to post healthy earnings. But prices have eased somewhat (to US$1.15 per lb. at presstime) and, with more mines due to enter production this year and next, producers know the good times will not last.

In recent years, the copper market was buoyed by persistent tightness in the supply of concentrates. But as new mines come into production and existing operations expand in various parts of the world, that tightness has begun to ease, providing the basis for a return to a market surplus.

Metals analysts are already predicting lower copper prices for 1996. Most predict that additional supply of refined copper, particularly from new operations using solvent-extraction electrowinning (SX-EW), will return the market to surplus. Indeed, some analysts predict a 15% price decline in 1996 over last year.

Analysts point out that the level of demand for copper will be the key factor this year, and not just in the Western World, but also in China and the former Soviet bloc countries. This global outlook will become even more important in the years ahead, as copper production is established, or increased, in developing countries. The demand side of the equation will also have to be looked at in a global perspective, because developing nations (non-traditional markets) are posting higher growth rates than most Western economies.

This global perspective is necessary, analysts say, because there are hidden dangers in the traditional statistical analysis of the copper market, which has focused on the Western World. In the past, the calculation was based on Western production plus net imports from the east bloc, minus Western consumption. This approach allows certain assumptions to be made, namely that consumption in the east bloc equals east bloc production, minus net exports.

Bloomsbury Minerals Economics, in a recent analysis of the copper market, points out that copper’s fundamentals looked better than they actually were in late 1993 and early 1994. At that time, Russia’s exports were falling sharply and Chinese imports were rising dramatically. At first glance, it appeared that copper consumption in those locales was rising rapidly.

But, in reality, as the firm points out, the shifts in trade flows reflected rising stocks in those countries. And, except for the short term, the implications were bearish, not bullish. This was confirmed when Russia’s surplus stocks came on the market in late 1994, almost ending the bull market, and when China’s surplus stocks were sold in late 1995, ending the bull market.

The firm now “globalizes” its market outlook, and others will likely follow suit.

Overall, demand for base metals is expected to be strong in 1996, particularly in the Far East, where growth rates are high. But because copper production is expected to exceed demand, the general outlook is bearish for copper prices. There may be rallies, but most analysts will regard them as correctional.