Historic copper prices may be on horizon as inventories drop to critical levels--RBC

by Dorothy Kosich

RBC says China remains the main driver of growth in global copper demand with forecast growth of 8.9% this year, as Western World growth is expected to slow to 2.9%.

RBC Capital Markets forecasts an annual average copper price of $4.25 per pound this year, also predicting that global copper demand growth will slow to 5.2% in 2011, down from 8.2% in 2010.

In the latest issue of Metal Prospects, H. Fraser Phillips, RBC metals analyst, noted, "The copper market remains tighter than the other base metals. Inventories are relatively low, there is little excess mine capacity, and utilization rates remain high, supporting strong pricing."

RBC forecasts a deficit a deficit in copper inventories in 2011 for the second consecutive year, and "for inventories to finish the year below critical levels." However, a predicted surplus in 2012 is expected to push inventories back above critical levels and should result in a price correction.

"In 2013 and beyond, we expect renewed deficits will draw inventories down to minimum levels, driving prices to levels that will restrict demand in order to balance the market," said Phillips.

RBC anticipates that refined copper production will remain constrained by mine supply throughout the forecast period, supporting historically high prices. 

However, by 2015, RBC's analysis suggests production will increase at existing copper operations as previously approved new projects come on line, contributing a total of 6 million tonnes of new copper supply.

"While the number of very large projects is limited, there are a large number of smaller projects," RBC observed. "Our forecast makes provision for new supply from some projects that have yet to be approved. In aggregate, these projects could contribute 2.6 million tonnes in new supply by 2015."

Despite their optimism on future production, RBC's base case supply demand/balance assumes that only 25% or 642,000 tonnes should actually come on line by 2015. "Mine capacity remains the bottleneck."

Nonetheless, Phillips stressed that copper remains "our preferred base metal. We forecast an average price of $4.25/lb in 2011, $3.75/lb in 2012, $4.00/lb in 2013, $4.25/lb in 2014 and $4.59/lb in 2015. Our long-term price forecast is $2.25/lb in 2011 US$."

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