Copper supply shortages will extend into the first half of next year as an accelerating Chinese economy more than doubles the pace of growth in global consumption even as mines extract a record amount of metal.
According to the International Copper Study Group, demand will outpace supply by 316,000 tonnes in the first 6 months more than all copper in London Metal Exchange warehouses before a surplus emerges in the second half, Barclays Plc estimates. Production has lagged behind consumption since 2010. The metal may average USD 8,300 per tonne in the Q2, 6.4% more than now and the most in a year.
China, which uses 41% of the world's copper is rebounding from 7 quarters of slowing growth after the government approved USD 161 billion subways to roads construction plan in September. It's being joined by central banks from the US to Europe to Japan who also pledged more stimulus. Housing starts in the US the second largest consumer reached 4 year high last month and business confidence unexpectedly strengthened in Germany, Europe's biggest economy.
Mr Dominic Schnider Singapore based global head of non traditional assets at UBS AG's wealth management unit said that "US growth will be moderate and Europe is stabilizing so that drag might reverse partially and then it all falls back to China. Economic activity doesn't have to be that strong in China for inventories to get drawn down and you could see a rally in the H1 but then you come into the second half where mine supply comes in on the strong side."
Quarter Century;
Copper rose 2.6% to USD 7,798 per tonne this year on the LME, the world's largest metals bourse as the LMEX gauge of six industrial metals gained 1.6%. The Standard & Poor's GSCI index of 24 commodities fell 0.1% and the MSCI All Country World Index of equities jumped 10%. Treasuries returned 2.7%.
According to the mean of 11 analyst estimates compiled by Bloomberg, the metal averaged USD 7,947.51 since the start of January headed for the second highest level in a quarter century after last year's record USD 8,825.98. Freeport McMoRan Copper & Gold Inc the biggest publicly traded producer, may report a 44% gain in net income next year. Shares of the Phoenix based company will advance 30 percent in the next 12 months.
Global Shortfall;
Barclays estimated that Global demand will expand 3.4% to 20.85 million tonnes next year from 1.5% gain in 2012. Supply will climb 3.5% to an all-time high of 20.83 million tonnes. While that means an annual shortage of 19,000 tonnes, it's driven by the projected H1 deficit compared with a surplus of 297,000 tonnes in the second 6 months.
According to Beijing Antaike Information Development Company, China's copper demand may rise 5.5% to 8.1 million tonnes from a gain of 4.8% this year which has researched metals for 2 decades. The infrastructure plans approved in September include about 2,000 kilometers of roads subway projects in 18 cities and extra spending on railways. The nation's economy will rebound this quarter from the slowest pace in 3 years and keep accelerating through at least the middle of 2013, according to the medians of as many as 37 economist estimates compiled by Bloomberg. That may not be enough to offset contractions elsewhere.
European Recession;
The 17 nation euro area tumbled back into recession last quarter and economists surveyed by Bloomberg expect Japan to do the same this quarter. Europe accounts for 18% of copper demand and Japan 5%. US leaders have yet to resolve the so called fiscal cliff of automatic taxes rises and spending cuts which the Congressional Budget Office has warned risks shrinking the economy. The International Monetary Fund cut its forecast for global growth in 2013 twice since July.
US Commodity Futures Trading Commission data showed that Hedge funds and other speculators are betting on lower prices. They held a net short 2,649 futures and options in the week to November 20th 2012 after turning negative the week before for the first time since August. While stockpiles monitored by the LME fell 33% to 249,975 tonnes this year, those in bonded warehouses in China reached a record 700,000 tonnes. Those tracked by the Shanghai Futures Exchange which are separate from the bonded warehouse figure, have more than doubled to 205,933 tonnes.
Keep Up;
Mr Andrew Shaw head of industrial metal and bulk commodity research at Credit Suisse Group AG in Singapore said that the improvement in demand will probably be capped out by the ability of supply to keep up. We're probably past the trough but it's not very convincing.
Codelco, the largest producer cut the premium it charges on top of the LME cash price on sales to Chinese buyers by 11% to USD 98 per tonne for 2013. That compares with a 5.6% drop to USD 85 for European buyers and an 8.6% reduction to USD 85 for Japan and South Korea. Lower fees usually signal higher supply.
Chinese inventories may start contracting as the economy strengthens. Exports rose in October at the fastest pace in five months and a preliminary reading of HSBC Holdings Plc and Markit Economics' purchasing managers' index for November signaled the first expansion in 13 months.
More Positive;
Mr Jeremy Goldwyn director at Sucden Financial Limited said that next year will be slightly more positive than this year. That's predominantly based on improvement in Chinese conditions marginally better in the U.S. and pretty much the same in Europe. Expectations for next year's global supply are probably too optimistic, Macquarie Group Limited said that constraints including power shortages in the Democratic Republic of Congo. The bank anticipates production growth of 4% next year and a significant copper surplus remains unlikely.
According to Macquarie, the mining industry is contending with rising costs from labor to energy and is extracting about 19% less metal from every ton of rock that it was in 2000. Codelco, based in Santiago, reported 5% drop in 9 month production on November 22 because of declining ore grades at its Chilean mines.
Freeport will report net income of USD 4.52 billion in 2013 from USD 3.14 billion in 2012. Its shares rose 4.6% to USD 38.49 this year and will reach USD 50.05 in 12 months. Copper accounted for 78 percent of sales last year.
Mr Nick Trevethan senior commodities strategist at Australia & New Zealand Banking Group Limited said that "We're still relatively positive on copper with China's economy recovering and the US as well. Europe's pretty much written off, but the China story's becoming more and more about China and less and less about the rest of the world."
