London, 8 April 2010

London-based metals consultancy, GFMS, long known for its definitive analyses of precious metals, has just launched its inaugural survey of supply and demand trends in the global copper sector at a copper conference in Santiago, Chile.  Speaking there, Neil Buxton, MD of the consultancy's base metals division, outlined the report's highlights. Overall current industrial fundamentals are not seen as justifying the current high price for copper, but it is investment demand (speculation) which has been largely responsible for driving the price to its current levels which are again approaching the peak seen before the crash in 2008.  Indeed GFMS reckons that the market was in a surplus of 777,000 tonnes last year with falls in demand in the key industrialised nations as a result of the recession more than offsetting the ‘remarkable' growth in Chinese demand.  Despite the seemingly poor overall demand fundamentals related to supply, global production continued to increase - yet the price managed to climb 141% over the year - and has continued to climb since!

This apparent disparity between supply/demand fundamentals and pricing was, Buxton averred, down to investment demand, Chinese stockpiling, increasing work-in-progress inventories in China and a relative improvement in the supply/demand balance during the year.  To some extent the correction will have followed the perception that the huge fall in price seen in the final quarter of 2008 was very much overdone and some of the early 2009 increase was a natural correction from these very low levels.

But despite current lacklustre fundamentals, GFMS reckons that markets have been taking account of a potential supply squeeze which could come about in the longer term as the industrial world continues to come out of recession given predictions of a persistently tight concentrate market ahead.

Looking at possible price patterns going forward, GFMS feels that recent price support when there was a limited downwards correction in price suggests there is a sufficient appetite from investors and consumers to underpin prices at least close to its current high levels, which the consultancy sees as limiting any serious downside.  But even so, there is the feeling that further upside potential from the current elevated price levels is limited for the time being as "it is difficult to see a new wave of money moving into the market, at least until the time when supply-shortages emerge.  Elsewhere, yield-hungry speculators are likely to actively trade copper-related news, macro developments and movements in other asset classes and this will likely maintain considerable volatility in the price."

Overall, GFMS concludes that prices will likely consolidate around current levels over the next few months and any downwards breaches of the February low and recent highs are likely to be shortlived.  Nevertheless with the prospect of the market moving to balance, and possible deficit, towards the year end as the anticipated global recovery gains steam, it is anticipated that investment demand will recur leading to what GFMS describes as "more noteworthy" advances and it would not be surprised to this see a price of more than $8,000/tonne before the year end.

Ends --