COPPER DUE FOR MORE POUNDING / BARRON´S MAGAZINE

Commodities Corner

SATURDAY, JULY 27, 2013

Copper Due for More Pounding

By TATYANA SHUMSKY

There's a ton of the metal and a real shortage of buyers. China's slowdown is not helping.

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Copper futures are trading near two-and-a-half-year lows after tumbling 15% this year, but don't bet on a rebound any time soon.

Prices are getting squeezed on both the supply and demand sides, which will likely continue for the next six to 18 months.

On the demand side: The warning signs flashed by the copper market in its recent tumble were touched off by the economic slowdown in China, by far the world's top consumer of copper.

China's economy grew 7.5% in the second quarter—a mind-boggling pace for the rest of the world, but a major slowdown from the double-digit growth the nation posted throughout much of the last decade, and even down a bit from the first quarter's 7.7% growth. The world's second-largest economy is expected to see an expansion of 7.5% this year, its slowest growth since 1990.

"With China accounting for about 45% of base metals consumption, this lower-growth potential at a time of improved supply suggests prices will stay under pressure," said Gayle Berry, a commodities analyst with Barclays.

Barclays was among several banks that cut their copper price forecasts in response to the Chinese growth outlook. The bank now expects copper to average $3.30 a pound in 2013—that's down 8.2% from its prior forecast.
 
September-delivery futures settled Friday down 8 cents, or 2.5%, at $3.1055 a pound on the Comex division of the New York Mercantile Exchange.

The supply outlook is equally bearish. Production from new and expanding mines continues to grow while demand slows. New mines like Rio Tinto's (ticker: RIO) Oyu Tolgoi project in Mongolia and Glencore Xstrata's (GLEN.U.K.) Antapaccay mine in Peru will add around 570,000 metric tons of copper production to the global market, according to Citi analysts. Meanwhile, the world's total copper supply will increase 5.4% or 900,000 tons this year, up from 3.2% growth in 2012, they add.

At the same time, production disruptions in the copper industry have been unusually light this year, helping to ramp up output. None of the mega-mines in Chile, which supplies about a third of the world's copper, have suffered a protracted setback in 2013.

Analysts typically expect between 5% and 8% of expected supply to be lost to various disruptions. Even a massive landslide in April at Rio Tinto's Bingham Canyon mine didn't dent much of the output onslaught. Work restarted just 17 days later. The company initially estimated it would lose about 100,000 tons of output due to the accident, but analysts now say lost production is likely to be a quarter of that.

ALL OF THIS POINTS TO A SURPLUS of copper for this year, the first such overhang since 2009. HSBC recently doubled the amount of excess copper it expects to be produced in 2013 to 320,000 tons, from an earlier forecast of 156,000. The bank also cut its price forecast to $3.27 a pound, from $3.63.

Despite these problems, mining companies may be aggravating the situation. Prices remain higher than the cost of production, which Goldman Sachs estimates at $2.63 a pound, giving mining companies few incentives to reduce output in the near term.

Goldman says that companies and other market participants will be stirred to cut back production only if copper prices drop to between about $2.70 and $2.95 a pound, which it expects in the next six to 18 months. 

TATYANA SHUMSKY covers commodities and other topics for The Wall Street Journal.

       
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