|Scrap Metal Prices-Copper|
The current bearish sentiment toward copper is being driven by concerns about China's economy slowing with the market ignoring the fact that mine supply is looking increasingly constrained, Citibank's research department said Tuesday. Over the last decade, average global copper consumption growth has been in the region of 2.5% a year, "a remarkably low average given the strong growth in China consumption rates. This average annual rate is less than half that for aluminium." Analyst at the bank David Wilson said that two factors have been at work to limit the rate of global copper demand growth. "Firstly, the strong Chinese demand rates effectively cannibalized demand growth in the Western World, due to the dramatic trend in manufacturing outsourcing to China, a trend that is now beginning to reverse. However, more important was the lack of significant copper supply growth, with mine supply averaging less than 2.5% over the last decade, effectively constraining demand growth," he said.
The investment bank's view is that copper mine supply is likely to "significantly underwhelm in 2015, just as it was in 2014." The start of 2014 saw a wave of analysts and market pundits predicting a hefty mine supply surplus. This stacked up as raw material, or copper concentrate, hitting a bottleneck at the smelting stage and thus no huge overhang of refined metal. By the end of 2014 the market's view had reversed.
"Reductions in 2015 production guidance for major copper mines have been coming thick and fast, with Rio cutting Kennecott's [Utah] expected output by 100,000 mt, BHP cutting 150,000 mt from Escondida's [Chile] 2015 outlook, while Glencore has cut guidance at Minera Alumbrera [Argentina] by 50,000 mt," (Kalenn's add in:BHP Olympic Dam reductions as well) Wilson said. The analyst reeled off a number of other closures in the research note adding that, "the current focus on Chinese macro-economic indicators represents, in our view, a significant misunderstanding of copper supply and thus copper market drivers."
Based on the bank's data, annualized losses due to declining ore grades, technical difficulties and cost/price related closures, are already at [circa]530,000 mt less than two months into 2015, close to [circa] 60% of typical statistical loss allowances for the year.
"This factor alone suggests supply factors will be key in divining copper prices in the year ahead," the note said. Citi is forecasting a mine supply growth rate of only 1.3% in 2015 from 2014, "a factor that will significantly inhibit refined production growth going forward. We expect increasing supply problems to be highly supportive of copper prices in the second half of the year, and continue to target a return to $7,000/mt levels before year-end." Copper was the worst performing London Metal Exchange base metal contract in 2014, down around 14% on year. There is much talk in the market of the copper price heading towards $5,000/mt in 2015. The metal hit a 2015 year-to-date intraday three-month price low of $5,339.50/mt in January. The contract closed the Monday LME kerb session untraded, last bid at $5,671/mt.
--Ben Kilbey, firstname.lastname@example.org
--Edited by Jonathan Dart, email@example.com "