Copper prices corrected recently by 12 % in LME to touch a low of 7835 per tonne and the trend don’t seem to be over yet. Fundamentals are pointing further selling in Copper prices as the current inventories are piling up to comfortable levels. It is the beginning of bear phase in Copper. The Bulls have taken backseat against the bears, as the collapse in Copper prices now seem probable with negative undercurrents flowing. Copper has been a highly volatile Base metal this year. The prices touched an all time high of 8900 per tonne on 2nd July 2008 in LME after that it corrected to test its one month low of $ 7835 per tonne on 30th July 2007. The returns in Copper so far this year have been lower when compared to peers. Copper three month forward contract on LME has given a return of 20% so far this year, as compared to 37% return in Tin and 24% returns in Aluminium respectively.
Since the start of this year Copper prices were reeling nicely in major exchanges because of the adverse weather conditions in China and operational and labour related issues in major mines of Chile, Mexico, Australia and Indonesia. But this news have so far been factored in Copper contracts. Copper is the best non- precious metal conductor of electricity as it encounters much less resistance compared with other commonly used metals. It sets the standard to which other conductors are compared. Copper is also used in power cables, either insulated or uninsulated, for high, medium and low voltage applications. Copper is an essential component of energy efficient generators, motors, transformers and renewable energy production systems.
Inventories in Copper have been rising. LME-registered stocks of copper have increased by 18450 tonnes in July to 142400 tonnes, recording a rise of 15%. Meanwhile the prices on MCX turned down from Rs 372 per kg on 1st July to Rs 343.50 per kg on 31st July down 8%, it would also be worth mentioning that during this period open interest in the contract depleted from 15137 to 9935 contracts which points out the increase of short positions by 34% in the contract and squaring off long positions simultaneously.
Analysts believe that as the whistle for Beijing Olympics blow, the demand for Copper will ease further. As it is the London-Shanghai arbitrage is contrary for imports of Copper in China. London-Shanghai arbitrage opportunity arises when the prices in LME of Copper are lower than the landed cost in Shanghai. So far the situation has been that the prices in LME three month forward market is quite high when compared to landed costs in Shanghai and thereby the demand from importers in China is lull. This is indicated in the fact that Chinese copper imports fell by around 24.4 % in June from the corresponding period previous year. Whatever demand is seen in Copper is the resultant of term contracts by Importers in China which they entered to hedge their portfolios.
On 21st July 2008, International Copper Study Group (ICSG) released preliminary data for World Copper demand and supply scenario for the month of April 2008. World Refined Copper production increased by 1.7% in the first four months of the year compared to corresponding period last year. Interesting to note is the fact that World Refined Copper usage declined by a marginal 0.5% due to decline in apparent usage by EU countries by 7% and China and US of 1%. This offsetted the growth in Japan by 3% and remaining countries by 3.4%.
Australian Bureau of Agricultural and Resource Economics (ABARE) in its latest report has also mentioned a slow pace of demand in the second half of 2008 and a decline in demand from the start of 2009. In 2009, World copper prices are forecasted to decline by 8% to average around $ 7169 a tonne. Further additions to supply capacity are forecasted to outpace growth in demand, allowing stocks to increase to 2.3 weeks of consumption. From January-June period the consumption of refined Copper in US declined by 7% reflecting a slowdown in manufacturing and housing sector. For 2008 ABARE expects an increase of 5% in World Mine production to 16.3 million tonnes. In 2009 the World Mine production is expected to increase by another 8% to 17.5 million tonnes. World production of refined copper is forecasted to increase by 4 % in 2008 to around 18.8 million tonnes, and by a further 7% to 20 million tonnes in 2009.
Writer's Comments:
Copper prices have been volatile since the start of the year. As the days pass the prices are looking to correct in the domestic as well as international markets. Slowness of demand in US and Europe was already factored in but the rising interest rates in India will be bringing the Industrial growth down. It is expected that the borrowing costs of the major manufacturers in India will rise further after the Inflation curbing regime by RBI. In China the traders are already pulling off from the imports due to negative arbitrage.
On the other hand, Dollar has seen some fresh bouts of rally against the EURO on the back of falling Crude prices which are expected to go down futher. This will ensure that the Staginflationary pressures in US will calm down in days to come. Therefore the commodities such as Copper which is also used as a hedge against Inflation will turn down. Copper is likely to ease towards 7700 per tonne on LME and 318 per kg on MCX.
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