CAPE TOWN, South Africa - Copper production is likely to continue to fall short of demand into 2012 and possibly 2013, driving prices to an average of $9,200 per tonne this year and $10,000 per tonne next year, an analyst with Standard Bank told the Investing in African Mining Indaba conference here.
Walter de Wet, head of commodity research for the Johannesburg-based banking group, said strong demand in emerging markets and especially China was driving pricing. "We expect demand to increase in all regions, even in developed markets, not because growth is so strong but simply because they are coming from a low base," he said.
Even as monetary tightening kicks in, China is expected to import at least 180,000 tonnes of copper per month through 2011 and into 2012, Dewet said. "Should this continue we expect the market remain in a deficit this year and next year."
Supply demand balance and price forecast
Source: Standard Bank
After a deficit of 58,000 tonnes in 2010, the copper supply deficit is expected to 385,000 tonnes this year and 561,000 tonnes next year, De Wet said. Copper prices fell more than $100 per tonne to just over $9,000 a ton in London trading on Friday after ending last week at $10,050 a tonne and setting a record of $10,060a tonne on Monday.
De Wet said the supply shortfall may result in global reported stocks being drawn down to less than one week of consumption by end of next year after which supply will begin to catch up with demand as high prices simulate new projects. A 40% draw down of inventories is expected in the next few months according to seasonal patterns, he added.
"If we get the visible inventory below 250,000 metric tons, running into 200,000 metric tonnes, then the copper price - at least nearby prices - has a tendency to spike quite substantially and spreads widen<" De Wet said. "That is, of course, a risk should we have a very, very strong performance in especially developed markets this year. The nearby copper price does have a potential to move substantially higher, maybe not on a sustainable basis but substantially higher in the short term."
Standard Bank has been mostly accurate in correctly forecasting base metals and forecast a price for copper of $7,375 per tonne in 2010 which was 2.2% short of the actual figure recorded last year of $7,539 per tonne.
De Wet noted that the break-even copper price for even the most marginal of mines is providing "good profits" at current levels.
"We are moving further and further away from the cash costs of production, which maybe from an equity perspective must be worrying, but if you look at the underlying commodity it certainly looks pretty good."
"Right now we estimate that even the most marginal of copper producers make in excess of 60% margins on their cash costs basis, which definitely is inducing some supply side response." A number of the new copper projects that were supposed to come on line about now but were postponed by the economic contraction are now expected to come on line from next year and slowly growing into 2015, he said..
"Fundamentals and strong investor interest are likely to keep prices on an upward path overall, though we expect there to be steep corrections and pauses for consolidation along the way," he said. "Volatility is likely to remain high."
About 55% or 56% of copper is currently consumed in emerging market and providing the market with good support, De Wet said. For the past two years demand from emerging market was the only growth sector but developed market demand is now expected to grow going forward as employment growth picks up, he said.
High prices currently are providing "some kickback from the guy that actually consumes copper," De Wet noted. This is not visible at the inventory level with the London Metal Exchange and Shanghai warehouses showing inventories that have been rising since late last year.
But De Wet noted that spot premiums paid for immediate delivery in China have dropped to almost zero from $150 a tonne last August. "We do not expect this resistance will last forever and we do not expect copper prices to collapse completely," De Wet said.
In terms of copper in emerging markets, "really we are pretty much in the sweet spot for demand at the peak of the business cycle for many emerging markets." In China, India and even Brazil growth is so strong at this stage that they are looking to tighten monetary policies to rein in inflation, which at currently supports commodity demand.
Phil Burgert is managing editor of ResourceInvestor.com. He can be contacted at firstname.lastname@example.org.