Copper heading for oversupply

After four years of substantial shortfall, it appears the global copper market is set to revert to oversupply in 1988 as production surges ahead, Shearson Lehman Brothers reports in its Annual Review of the World Copper Industry 1987.

Forecast is a growth rate in non- Socialist world mine production from the 1% in 1986 to nearly 3% this year, to a total of 6.7 million tonnes. The United States will be largely responsible for this gain. An acceleration to 6% growth is expected in 1988, followed by a tentative 4.6% in 1989. Major expansions during the next two years will be seen in Latin America, the U.S. and Australasia.

“Mine and leach production capacity is also set to expand vigorously during this period, but it appears the forecast 1989 output of 7.43 million tonnes will represent a higher utilization rate than for many years,” says Shearson’s London metals research unit.

Written prior to the current world stock-market shake-out, the report forecasts a fourth-quarter “best estimate” copper price of 78.5 cents (US) per lb and an average price for 1987 of 71 cents . While a rise in the average price, to 73 cents , is foreseen for 1988, a drop to 68 cents is predicted for 1989. Price moves ahead

“After three disappointing years in which copper prices failed to respond, except in a mild seasonal manner, to persistent market shortfall, the metal has in 1987 moved ahead strongly as stocks have continued to decline. While the improvement of nearly 40% in dollar terms (to the 80 cents -85 cents area) has been impressive, it has been rather less so in many other major currencies,” the report says.

Market squeezes or shortages in particular areas (such as Japan) could still be seen supporting rallies to around 90 cents , but Shearson does not expect the price to reach $1. At the same time, the company warns, bouts of weakness down towards 70 cents -75 cents are possible in the near future in reaction to the progress already made.

“In short, copper is forecast to trade in a volatile manner before the fundamentals exert more sustained downward pressure as 1988 unfolds,” the report says. “The changes wrought in recent years should, however, enable the metal to find solid support at around 65 cents -70 cents as compared with the 55 cents – 60 cents band of 1984-86.”

In 1989, copper will derive some benefit, in an otherwise weak market with average real costs of production still falling, from the fact mine capacity utilization will be approaching 90%, the report says. Record consumption

Copper consumption in the non- Socialist world reached an all-time peak of 7.73 million tonnes in 1986, an increase of 5.8% over the 1985 level. Substantial growth in the U.S. (9.9%) and the “non-mature” economies (16.9%) were the major reasons for the rise. Consumption in western Europe grew more modestly, while it fell in Japan (1%) and Australasia (6.3%). Shearson says the marked rise in the “non- mature” economies continues a trend which has been under way for some time.

While between 1979 and 1986 total consumption in the “mature” economies has declined at an average annual rate of 0.5%, last year the U.S., Canada, Japan and the four major European economies accounted for about 71% of non- Socialist world copper consumption.

On east-west trade, Shearson says that while the steady net flow of concentrates and blister to the Eastern bloc is likely to be maintained in the coming two years, trade in refined copper has rapidly become a less important ingredient in the over-all supply-demand balance.

The sudden emergence of the Chinese as major buyers in the early 1980s contributed to the market deficits of 1984 and 1985, but the level of purchases fell last year as far as it had advanced earlier on. Forecasts of future Chinese activity are difficult to make, Shearson says, but it feels that while purchases will continue to be made, they are unlikely by much to exceed Western imports from such countries as Poland.

A world deficit of about 90,000 tonnes copper is projected for 1987, with a surplus of 330,000 tonnes predicted for 1988.

“Mild indications that stocks have already bottomed out are beginning to become apparent,” the report says. “Such is the current level, though, that inventories are likely to remain very low by historical standards for some time to come. Even by end-1988 the stock- consumption ratio is expected only just to exceed 1 1/2 months. Not until the following year are inventories likely to exceed what may nowadays be considered `normal’ levels.”