Joining the Dots
Copper Drawn to the Wire
What drives the metal's price volatility?
Nidhi Nath Srinivas
Copper is down 35% this year from a record high in mid-February. From not having enough, suddenly we seem to have too much. What has changed so dramatically? And will it reduce your own wiring and plumbing costs? ET helps you join the dots. Traders and economists view copper as a "bellwether" because of its multiple end-uses, which make it a good gauge of global manufacturing. LME's copper contract is down to its lowest since July 2010 because punters believe the world economy is headed for mayhem.
The US and Europe together consume a quarter of global refined copper supply of 20 million tonnes, and both clearly won't be using as much in future. In September, the eurozone factories manufactured less for the second month in a row, as new orders shrank at their fastest pace since June 2009.
China is the world's largest copper consumer and last year, singlehandedly pulled up prices by almost 50%. Now even in China economists see evidence of a cool-down. China's factory activity typically rises in September as businesses prepare for the Golden Week holiday, but this year's increase was smaller than the average.
India's factory sector has gone from robust growth to near-stall speed in just five months. Export orders have been falling steadily since mid-summer as Europe's debt crisis intensifies and the US economy slows.
India's factory sector has gone from robust growth to near-stall speed in just five months. Export orders have been falling steadily since mid-summer as Europe's debt crisis intensifies and the US economy slows.
In 2009, governments and banks had the muscle to give industry a firm push forward. Now both are too weak to reverse global industrial sluggishness. As traders see copper as an asset leveraged to global growth, the crash reflects these macroeconomic fears.
Adding further pressure is the scramble to exit by hedge funds, index traders and banks. Big speculators have slashed their bullish bets in the US commodity markets by a record $34 billion over the past two weeks.
Adding further pressure is the scramble to exit by hedge funds, index traders and banks. Big speculators have slashed their bullish bets in the US commodity markets by a record $34 billion over the past two weeks.
Does this mean large users such as power stations and building construction can expect cheaper copper? Not so fast. The price of paper copper is falling faster than physical copper.
When Chile's Codelco, the world's top copper producer, negotiates supply contracts with Chinese consumers in November, it is expected to demand a premium of $113 a tonne over the LME cash price in 2012, little changed from $115 a tonne this year.
Copper's extraordinary volatility is another factor that will limit discounts. The entire production and processing chain is now faced with heightened risk and managing it is more expensive. The extra cost will be passed on to consumers.
When Chile's Codelco, the world's top copper producer, negotiates supply contracts with Chinese consumers in November, it is expected to demand a premium of $113 a tonne over the LME cash price in 2012, little changed from $115 a tonne this year.
Copper's extraordinary volatility is another factor that will limit discounts. The entire production and processing chain is now faced with heightened risk and managing it is more expensive. The extra cost will be passed on to consumers.
More importantly, physical demand does not stall overnight. Both India and China are in the midst of building cities, infrastructure, new factories and power stations. This means continued demand for copper, albeit at a slower pace as credit becomes tighter.
Last year, China built up large strategic stockpiles of copper. This year it has not been as aggressive. But China is a price-sensitive buyer and with copper demand rising 6% annually, it will be back in the market.
Even the gloom over US economy may be a trifle overdone. US companies are cash rich and manufacturing and construction spending is expanding.
On the other hand, copper supply remains inadequate. Existing mines in Peru and Chile are beleaguered by labour unrest and declining ore grades. Industry body International Copper Study Group has forecast a global deficit of 200,000 tonnes this year. Next year, it expects another deficit as production grows by 3.4% while demand rises 3.6%.
Sinking new mines, each costing $2-5 billion, requires deep pockets. All the major copper companies such as BHP Billiton, Rio Tinto, Xstrata and Vale have strong pipelines for expansions and new projects.Yet, 21 of 50 largest reserves development projects are in the hands of smaller mining companies, with stretched credit lines.
Some of the potential new operations are in regions of the world with high geopolitical risk. To make matters worse, projects that seem feasible with copper above $10,000 don't make sense at today's $6,500 levels. This means further delay in new supply.
Even the gloom over US economy may be a trifle overdone. US companies are cash rich and manufacturing and construction spending is expanding.
On the other hand, copper supply remains inadequate. Existing mines in Peru and Chile are beleaguered by labour unrest and declining ore grades. Industry body International Copper Study Group has forecast a global deficit of 200,000 tonnes this year. Next year, it expects another deficit as production grows by 3.4% while demand rises 3.6%.
Sinking new mines, each costing $2-5 billion, requires deep pockets. All the major copper companies such as BHP Billiton, Rio Tinto, Xstrata and Vale have strong pipelines for expansions and new projects.Yet, 21 of 50 largest reserves development projects are in the hands of smaller mining companies, with stretched credit lines.
Some of the potential new operations are in regions of the world with high geopolitical risk. To make matters worse, projects that seem feasible with copper above $10,000 don't make sense at today's $6,500 levels. This means further delay in new supply.
The current global slowdown may narrow copper's demandsupply gap and shrink producer premiums. There will be no discounts as demand from emerging nations outpaces mine output. Copper's sharp sell-off is created by the same fear that is flattening equity markets. For paper punters, that is a big deal. If you are a copper user, ignore it. In the real world, life goes on.
Comentarios