London, 19 August 2009 

Copper Raising the Bar: Copper has been at the forefront of the rally in the base metals sector. The cash quote has more than doubled from the low of $3,051/tonne to a recent high of $6,419/tonne. Although prices have slipped by around 5% since then, GFMS’ latest analysis on the copper market suggests that the downside potential is limited given the underlying fundamentals. On an average annual basis, we expect higher prices each year out to 2012. 

Strong Chinese consumption coupled with expectations for a recovery outside of the country to commence late in the year has led us to revise our projections for demand to show marginal growth for the full year in 2009. Our forecasts for production, in contrast, remain more or less unchanged. As a result, we have reduced our forecast of the likely surplus for 2009 to just 245,000 tonnes from our earlier estimate of 441,000 tonnes.

The 245,000 tonne surplus forecast for the year does not, in our view, necessarily contradict the decline in LME inventories registered this year-to-date as much of that material found its way into unreported inventories, largely in China. As these inventories begin to weigh on the local market, we would expect imports into China to fall, resulting in LME stocks beginning to once again rise. Indeed, in our view this has already started, with initial import data for July (which covers both metal and products) showing a 15% m-o-m decline.

Coupled with some profit-taking by investors, this will drive a decline in copper prices in the short-term. Nevertheless, as the trends in supply and demand are clearly suggestive of a noteworthy improvement thereafter, this is expected to be short lived, with funds and end user front-running triggering a move to deficit in 2010, setting a positive trend for the price from Q4 this year. At that stage, we would not be surprised to see prices topping $6,500/tonne and generating a Q4 average of $6,000/tonne, resulting in a full-year figure of $4,900/tonne.

Inevitably, the focus of the market in late July/early August has been on the impact of investment funds. However, there has been support from the underlying fundamentals. The tightness stems from the shortage of concentrate. GFMS forecasts that global concentrate production will decline by 1.6% this year following no growth in 2008. Latest developments in spot treatment charges reflect this situation, and the decline in spot treatment charges is sending “bullish” long-term signals to the copper market. In the key Chinese market, spot TC/RCs in early August have fallen to $20/tonne (2c/lb) from $40/tonne (4c/lb) in June and $90/tonne (9c/lb) at the beginning of the year.

A strong recovery in consumption coupled with slower mine production (and by implication refined production) growth are the architects of the 88,000 tonne deficit we forecast for 2010. In addition to the direct impact of the improvement of the fundamentals on prices, the swing of the market to deficit (as well as the improvements in the wider commodities complex) is also expected to trigger additional investor interest in the metal, which will further boost prices. Copper cash prices are forecast to top $7,500/tonne, averaging $6,500/tonne in 2010.

The deficit is expected to persist throughout the rest of the forecast period, and its magnitude in fact grows in 2011 and 2012, to 121,000 tonnes and 176,000 tonnes respectively. It should be noted that not all of the inventory reduction will take place on the LME as we believe that there has been a build of unreported inventories within China. Therefore our supply-demand balance projections suggest that LME inventories will trend lower over the forecast period but may not reach the levels of under 100,000 tonnes briefly seen in the recent bull market.

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GFMS Limited is the world’s foremost precious and base metals consultancy. GFMS is based in London, UK, but has representation in Australia, India, Spain, France, Germany and Russia, and a vast range of contacts and associates across the world.

www.gfms.co.uk