Prices keep rising on speculation that supply won't meet demand
WEB EXCLUSIVE
Staff -- Purchasing, 9/1/2005
Copper prices keep setting record-highs because of buying by hedge funds spurred by critically low global inventories and a sluggish response from producers to a China-led demand boom. "Metal continues to trickle into London Metals Exchange warehouses rather than the flood that was expected," says an e-mail report from analyst Robin Bhar at Standard Bank in London.
Through July, copper on the LME averaged $1.53/lb in the spot market and $1.45 in the three-month futures market. The benchmark three-month contract on the LME broke through the $3,600/metric ton ($1.63 lb) level for the first time in early August. In fact, prices of LME futures on copper for delivery in three months have gained 13% this year, after a 37% rise last year. The main pricing-sentiment driver has been LME warehouse stocks, which have fallen 35% this year and were just 35,000 metric tons in early August, or about half a day’s world consumption. The stock situation has been exacerbated by a series of mine and smelter interruptions, caused by community uprisings in Peru, earthquakes in Chile and, more recently, labor disputes at Asarco’s U.S operations. Most participants agree the current high prices are unsustainable; Phelps Dodge execs reckon that global copper’s third-quarter cash price will average $1.55 or better (vs. $1.64 in July.) However, opinions are divided on how high prices can go in the fourth year of the current cycle. "The rumored big stock increases from the Far East haven’t materialized," says analyst Angus MacMillan at the Bache Financial unit of Prudential Financial. "Unless we see that, the market will remain tight." Michael Cooper at Sydney-based risk advisory and funds management firm Noah’s Rule says the red metal appears bound for $4,000/metric ton ($1.81/lb) over the next six months. "It would seem the temperature of the market, the underlying fundamentals in the short-term and recent price action suggest the market is going to go higher," Cooper tells Dow Jones Newswires. "With global inventories for the most part lower than historical averages and capacity utilization rates likely to remain higher, we see the potential for a prolonged period of better prices unfolding over the next five years and beyond," according to an e-mail from Macquarie Research analyst Jim Lennon. Juan Villarzu, president of Codelco, the world’s largest copper producer, told a mining forum some weeks ago that current prices are unsustainably high and Asian consumers would turn to substitutes if high prices persist. Cooper agrees: "We may find people retool and use either aluminum or fiberglass to make some products and that will take some of the demand away." That’s partly why Scott Tracy, chief investment officer at Endeavour Funds Management, offers that prices are likely to move back to $3,200/metric ton ($1.45/lb) or even $3,000/metric ton ($1.36/lb) in the near term. As consumers are largely sidelined by current high prices and seasonally low demand, all it will take for speculative sentiment to sour is some news on supply or demand that is not supportive, Tracy says. Recent data showing an improvement in U.S. manufacturing activity may delay the copper market returning to a surplus, according to analyst Shen Haihua at Southwest Futures in Shanghai. Macquarie Research’s Lennon suggests that base metal prices may stay on the upside as buyers start to look beyond the seasonally quiet third quarter. "When the strong-demand period starts at the back end of the year, we could end up with higher prices than people anticipated," agrees analyst Glyn Lawcock at UBS Securities. Some of that may be supply driven, since the response of producers to the global commodities boom—after years of under-investment when prices were low—has been slower than many expected. Soaring input and transport costs and tight labor and equipment markets continue to thwart development, while sky-high prices of copper-mining byproducts like molybdenum mean some producers aren’t churning out as much copper as they could. Higher running costs, particularly in the electricity-intensive smelting industries, are also eating into profits and keeping supply growth in check. "I still think the supply inelasticity theme that has underlined these markets for some time is going to be with us for the decade," Cooper says.
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