The Copper Price Is as Good a Guide as Any to The Progress of The Mining Sector

Traditionally, the copper price is as good a guide as any to the progress of the mining sector. It’s a relationship that has worked in the past and did again this year as well, with copper adding 5% over 12 months while the general UK mining sector was up by a similar amount until recently.

Copper is used as the barometer due to its use in consumer products as well as in the construction industry, which makes it a good proxy for global growth.

It was one of the most stable base metals over the past year, despite concerns about slowing growth in China and the ongoing problems in the eurozone.

Copper even came through the jitters in the autumn in decent shape, when concerns that China was slowing rapidly sparked sell-offs across many other base metals.

Going forward, sentiment will again be dominated by China in 2013 but compared with three months ago the mood is a lot cheerier.

Demand for copper for use in major infrastructure projects is tipped to remain strong with growth also from motors, property and construction.

There is also the wild card of possible economic recoveries in the US and also the eurozone, though even without these consensus forecast are for the copper price to rise to about USD 8,600 per tonne from USD 8,000 currently.

Steel is another major component in infrastructure, but its year has been anything but stable with serious and in some cases disastrous consequences suppliers of the raw materials that make steel.

Iron ore producers in particular have endured a rollercoaster ride since the autumn.

Iron prices slumped to well under US$90 per tonne at one point, accompanied by reports of shipments being left at sea as Chinese importers defaulted on payments as the steel industry rapidly de-stocked and contracts switched to quarterly or spot pricing.

After hitting a three year low in September, the price has rallied equally strongly, adding more than 40% in two months as economic indicators in China have improved and new measures to boost the flagging economy were introduced. 

Credit Suisse predicts an average price of about USD 120 per tonne level in 2013, but more volatility as the broker estimates it will take 2-3 years to knock out China’s high cost capacity. 

Broker RFC Ambrian said that a large additional hurdle for a sustainable higher nickel price is its substitution in steel making from nickel pig iron, a low-grade ferronickel, which acts as a cap on nickel prices.

Ambrian adds though that the supply/demand equation for nickel is tight and it will only need a small reduction in output to affect prices. Morgan Stanley sees the zinc price in 2013 at USD 18,300, though Credit Suisse is more bullish at USD 21,000 per tonne as it sees supplies drying up.

Zinc and lead are both showing modest twelve months gains, which are tipped to continue, modestly.