Questions for Copper

Trying to read the copper market is increasingly a daunting task. Throughout the past several years, prices have reflected the market’s uncertainty, as macro-economic trends have driven markets to record highs and to sharp corrections.

After enjoying a rocket ride through much of the first decade of this millennium, at the end of 2008 copper prices collapsed as demand practically disappeared. Copper prices, which averaged nearly $3.65 per pound through the first nine months of 2008, dropped to less than $1.45 per pound by December 2008.

Copper demand and pricing have rebounded from early 2009. But ominous clouds hang on the horizon.

THE BIG PICTURE

First and foremost, the overall economy has had a considerable effect on red metals. Many economic indicators are pointing to an economic recovery, though with high unemployment and a struggling housing market, the economy has a long way to go before it gets back on track.

The market is sending mixed signals right now, says Rik Kohn, vice president of sales with Federal Metal Co., a Cleveland-based supplier of brass and bronze ingot. While stimulus funding has helped some consuming industries, such as the military, the housing sector, a major consumer of copper, languishes still.

With unemployment near 10 percent, Kohn questions the depth of the recovery. “It is tough to look positive,” he adds.

Competition for scrap material remains challenging, however, with China the most obvious player in the market, Kohn notes.

As a secondary issue, questions about the availability of credit remain. One scrap metal recycler says, “Banks are not lending to small businesses. If banks don’t lend, then it is difficult to grow your business.”

Larger companies that may have ready access to capital are sitting on cash, which restrains expansion.

Inventory questions also exist on the scrap side. Kohn says scrap metal recyclers are not holding much inventory now. With such uncertainty in the market, traders of copper scrap are afraid to accumulate large inventories in case another swift and significant retrenchment takes place.

According to a report by the investment house Canaccord Genuity, key concerns for the copper industry include the strength of the Western economies in restocking supplies, which so far seems fairly weak; whether end-use demand in China can support continued imports of copper metal and concentrate; and whether off-exchange stockpiles in China continue to be built or are released into the market.

Despite these questions, copper prices have been moving up in fits and starts in the last year and a half. Prices have been hovering around the $3 per pound level. This may be a far cry from the highs seen several years ago, but nonetheless it is at a level significantly higher than it was less than two years ago.

Buying by investment houses also has picked up, according to many physical handlers of copper. This adds to the overall uncertainty concerning copper’s direction.

Although several consultants have been forecasting a fairly sharp retrenchment for copper because of an anticipated oversupply of the metal, inventory levels appear to be diminishing. Dan Edelstein with the U.S. Geological Survey says supply and demand are almost in balance at present, despite speculation to the contrary. “People expected a large surplus,” Edelstein says.

The Canaccord Genuity report forecasts global copper consumption growing at an annual rate of 6.7 percent, 6.2 percent and 4.4 percent per year for 2010 through 2012. These predicted increases follow a retraction of 3.9 percent in 2009. In the U.S., copper consumption is slated to grow by 5 percent this year and by 2.5 percent in 2011.

The report also notes that China, which accounts for nearly 38 percent of global copper consumption, is expected to consume 10 percent more copper in 2010, a far cry from the 28 percent increase in copper consumption the country experienced in 2009.

China’s copper consumption is expected to continue its downward trend, with 2011’s consumption stabilizing at 10 percent growth before slowing to 8 percent in 2012 and in 2013, according to the Canaccord Genuity report.

The International Copper Study Group (ICSG) also forecasts a decline in world copper refined usage of 1.5 percent to 17.9 million metric tons in 2010. An average increase of 6.9 percent in three major markets—the United States, the European Union and Japan—will be offset by a decline in apparent usage in China of around 13 percent, ICSG says.

However, the ICSG forecasts industrial demand growth for copper in China, which is based on anticipated semi-manufacture production, of 7.5 percent and 5 percent, respectively, this year and in 2011. By next year, world copper usage is forecast to recover, climbing to 18.9 million metric tons, according to the ICSG.

While demand is a key driver for copper, the other half of the basic economic equation is supply. Canaccord Genuity estimates that inventories climbed through the second half of last year and early this year, ultimately peaking during February 2010, with the Shanghai Futures Exchange (SFE) peaking in April 2010.

Combined exchange inventories have declined by 139,000 metric tons from the peak of 795,000 metric tons.

One of the most widely asked questions about copper is what the actual inventory level is. Traditionally, the London Metal Exchange (LME) has been watched closely for signs of where copper markets are headed. However, as of late, it appears that the SFE is playing a growing role in the market.

As for copper scrap and concentrate