China has mavens calling for $1 cathode in 2004
Tom Stundza -- Purchasing, 4/1/2004 2:00:00 AM
Seventy-two percent of the metals buyers polled in February expect higher-priced copper and brass in the first quarter. This is the highest percentage fretting about future prices since Purchasingdata.com's monthly survey began asking the question in 2001. With the world economy growing, global copper prices will increase more this year than initially expected, agree market researchers who have raised price forecasts for 2004.
Key point: Strong Chinese demand growth will continue to put upward pressure on prices of this key nonferrous metal, says analyst Mark Pervan at Daiwa Securities. "Many other Asian economies also are growing and expanding their use of the red metals," he adds. "Europe is at the start of an economic growth cycle and the U.S. is showing potential." Upshot: The global market now is expected to show a supply deficit of 850,000 metric tons this year.
So, surveys of three dozen analysts by various news services and magazines (including Purchasing) now suggest the price rallies for nonferrous metals will extend well into 2004, as rebounding economies in the U.S. and Europe add to soaring demand in China. The annual copper price, which rose almost 13% last year on the London Metal Exchange (LME), will rise another 24% this year, according to the consensus of analysts.
Consumers drained inventories of copper and nickel last year because demand surpassed production when China's economy expanded at an 8.5% pace. China is the biggest user of industrial metals. "China's demand for commodities is forecast to grow again in 2004, but the key is going to be the pace of recovery in the U.S. and Europe,'' says Evy Hambro, who manages the World Mining Fund at Merrill Lynch & Co. in London, which has $1.2 billion in assets.
Chinese demand for metals is soaring as the country builds homes, schools and other essentials for millions of rural residents who are flocking to cities in search of work. In fact, an estimated 20 million Chinese will migrate to cities annually over the next decade. Atop that, the country is investing billions to build road, bridge and highway infrastructure in preparation for the 2008 Beijing Olympics. Builders are the biggest users of copper, accounting for about 40% of annual world demand, according to the New York-based Copper Development Association.
Use of copper worldwide will exceed new production by 371,000 metric tons in 2004 after a shortfall of 308,000 metric tons last year, suggests a report by Morgan Stanley's metals market researchers. Chinese demand will rise 10%, on top of a 17% gain last year. "China's copper consumption is off the charts,'' agrees James Cowley, vice president of sales at the Kennecott Utah Copper Corp. mining unit of London's Rio Tinto Group. The current consensus forecast for LME copper is an annual average of $1/lb, compared to 81¢ in 2003. But, if China's demand for copper grows at 15% or more, "there's no way we can produce that much copper,'' Cowley says. "If that happens, we could really see a price spike.''
An average car contains about 40 pounds of copper, mostly wire. So, higher coppermetals prices threaten to boost costs for such key consuming manufacturers as General Motors, the world's largest automaker. The firm is paying more for such components as wiring harnesses that contain copper, says Kathie Cepica, the company's copper purchasing specialist in Warren, Mich. The company has limited the cost increase through hedging practices that include trading in over-the-counter copper futures and options contracts, Cepica says. "We have a certain percentage hedged at a certain price,'' adds GM's global commodities manager of nonferrous metals, but won't say how much. "You wouldn't want to hedge 100% of your exposure anyway, because of the uncertainty in the market,'' she says. "You could be wrong.''
Analyst Andrew Cole at Metal Bulletin Research in London notes that "given the investment funds' appetite for copper as a speculative target, driven by ever-tightening raw material supply and by ever-accelerating demand growth, the red metal is poised to score strong price gains this year and next." Key point: LME stocks of copper declined from 855,000 metric tons at the start of 2003 to 433,000 metric tons at the end of the year. Copper inventories in London Metal Exchange warehouses plunged 49% last year because of the shortfall in supply that was prompted partly by stockpiling of the metal by Chile's state-owned Codelco, the largest copper mining company, and by production cutbacks by Phelps Dodge and BHP Billiton.
Most analysts agree with Cole that there's little inventory available to relieve the expected deficit in 2004. "My feeling is that China has been absorbing the vast bulk of the 2003 excess," says minerals strategist Angus MacMillan at Prudential Bache Securities' London office. "There are some stocks being held by China's State Reserve Bureau, but the idea that people are importing copper to let it sit at dockside in Shanghai simply isn't the case." MacMillan adds: "The rate of economic growth in China is such that this material is being consumed."
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