Copper leads base metals boom in 2011

By Tapan Mishra

Copper is the most talked about commodity this year. Copper’s price and supply-demand characteristics are widely assumed to reflect the health of the world industrial economy, hence it is considered as excellent barometer to understand global economy’s health. In 2010, copper has outperformed other base metals and given returns of 30% with copper prices touching an all-time high of R465 per kg in first quarter of 2011. While gold has appealed to those seeking a hedge against inflation, copper has seen demand for its industrial use rise.

In 2011, copper prices are to be driven by strong fundamental factors like tight supply situation and increasing demand. Supply will play a key role in shaping copper’s price this year, after a 30% decline in stockpiles last year—the most since 2004 — and an anticipated shortfall once again in 2011. Refined copper production is set to rise but just at 1.12% lesser than the rise in demand of 4.50%. It is estimated that in 2011, the copper demand will surge around 4.50% backed on strong demand from China, India and also growth in US. International Copper Study Group has estimated global copper market will be in deficit of 4,50,000 tonne in 2011.

Copper Supply Constraints
Many leading mines across the globe that were developed over two decades ago are yielding ore with less and less metal content. Production at Escondida, the world’s largest copper mine, is anticipated to drop as much as 10 % in the next 12 months because of lower grades.

Due to shortage of domestic mines and a low percentage of productivity in the existing mines, India is already suffering loss in the level of production for Copper. Rising prices are attracting companies to start newer venture but copper mining projects take a long time to commence. Hence, no new major copper supply will be seen in 2011 further tightening the inventory situation.

Growing economies e.g. China and India are among the largest demand sources for industrial metals since the beginning of the last decade, and are responsible for at least 30% to 45% of all base metals consumption. India accounts for 3% of the global output but still has to depend completely on the copper ore imports. China’s State Reserves Bureau (SRB) will buy more refined copper in 2011 even as the prices hover near a record high, though the buying would not be that aggressive.

Overall, India and China’s copper imports are expected to go up this year and demand is also likely to rise by 7% in 2011 from last year. South Korea’s Public Procurement Service is also looking to raise copper stocks to 46 days of consumption in 2011 from 2010’s 42 days.

The pace of depletion in copper inventories at London Metal Exchange monitored warehouses is also indicative of a very strong demand outlook amid tight supply. In the past one year, copper stocks at LME-monitored warehouses have declined nearly 25%.
The world’s growing economies may choose to increase interest rates in an attempt to curb liquidity and control inflation. The People’s Bank of China has already increased key one-year lending and deposit rates by 25 basis points effective from 18 th Feb 2011. Another fear is of the substitution.

Rising copper prices will encourage use of other metals in plumbing & construction. Substitution will pull out around 3% of the copper in 2011. But at the same time, new usage like electric and hybrid cars should make up for the loss of demand caused by substitution. Since the fundamentals of the metal are strong, such negative factors could only drag copper prices down for a short period.

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