TORONTO (miningweekly.com) – The copper market will remain in a supply deficit this year, and prices for the metal could set new highs “toward $11 000/t”, metals consultancy GFMS said in an industry report launched on Tuesday.
Copper, which rose to a new record at $10 148/t in February, ended 2010 in a deficit position, after strong demand in the second half of the year more than offset a small surplus in the first six months, according to the group's new 'Copper Survey 2011'.
But although GFMS is positive on copper in the medium term, it does see the possibility for a reasonably steep correction in the coming months, senior analyst Nikos Kavalis said in an interview from Santiago.
“In the near term, we would certainly not rule out a correction well below $9 000/t,” Kavalis told Mining Weekly Online.
Negative industrial production indicators in developed countries, concerns over Chinese monetary policy or renewed worries over sovereign debt problems in Europe could have a significant effect on the copper price, because investors are already pricing in positive expectations, he commented.
Investor optimism “brings about price increases that the fundamentals by themselves could not have achieved”, Kavalis said.
“Over the last few months all the indicators have been very rosy for industrial production, but I don't think we are out of the woods by any stretch.”
But if prices do fall, say to the low $8 000s, the market would be strongly supported by bargain hunting by investors and restocking by copper consumers, he said.
“Consumers have been keeping inventory at extremely low levels and in a sense operating in a hand to mouth fashion,” Kavalis said.
“If prices fell to those levels we would expect a remarkable reaction from the market, given that people have seen $10 000/t copper, and a lot of analysts in the market are predicting much higher prices.”
Copper for three-month delivery rose to $9 390/t on the London Metal Exchange on Wednesday, despite the announcement by China's central bank that it has raised interest rates again.
Bloomberg reported that the copper price was buoyed by news that heavy rains had affected production at big mines in Chile and Peru.
Beyond the risk of a short-term correction, GFMS is positive on copper, with demand expected to exceed supply in 2011 and no sign of waning in investors' appetite for the metal.
The 'Copper Survey' predicts another deficit this year, and Kavalis said the market will likely stay the same way into 2012.
Demand from developing countries like China remains strong, and consumption in mature copper markets in Europe, the US and Japan also surprised a lot of market watchers with the rate of demand recovery achieved in 2010, he said.
“And we get the feeling that that is continuing this year...we are expecting above trend growth in mature markets for 2011 overall,” Kavalis said.
According to the 'Copper Survey 2011', global refined consumption exceeded supply by 286 000 t.
On the supply side, GFMS expects that copper mine production growth will accelerate over the next few years, as the industry works to take advantage of high prices.
“There is a very strong pipeline,” Kavalis said.
“The high price environment is encouraging miners to bring projects onstream and increase capacity, increase output where they can.”
But he cautioned that the industry will likely fall short of its production targets and plans, as has been the case over the last decade.
“So some of the projects that are being planned will come onstream a lot later than announced, they will come on at lower production levels, and some may not come at all,” Kavalis said.
Production at operating mines will probably also continue to face disruptions, including weather-related difficulties, geopolitical challenges and strikes, he said.
“At these pricing levels the bargaining power of labour is a lot higher and therefore its almost inevitable that you will see some disruptions there.”
Global copper mine production growth slowed to 0,8% in 2010, as miners battled falling grades and industrial action.
Total output for the year increased to 15,9-million tons, while global average cash costs rose by 11,4% year-on-year, to $1,12/lb.
Refined copper production rose by 3,8%, to 19,1-million tons, GFMS said.