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Copper on a precipice as stocks reach decade high

Property sector slump

Global copper inventories held in warehouses operated by the London Metal Exchange have risen to the highest levels since 2003, not long after the onset of the China-led supercycle in commodities.

LME copper stocks have risen 165% to 557,000 tonnes since October as Chinese buying – responsible for 42% of total global demand of 20.5 million tonnes – appears to be on the wane.

The price of the metal, the bellwether for the industry, is down 8.5% since the start of February, but improved from a 7-month low on Tuesday of $3.38 after a report from China showed better than expected manufacturing activity in the world’ second largest economy.

The optimism spurred by the Chines PMI numbers is proving shortlived however.

Standard Bank in its daily market commentary points out that “the recent price action of metals such as copper has not been consistent with restocking behaviour. In fact, the only metal with industrial exposure to China which is up YTD is palladium, and that is arguably because of a distressed supply side rather than strong demand out of China.”

Front month copper futures were trading at $3.45 a pound in New York on Friday, a decline of more than 25% from record highs set in February 2011.

At these levels the price of copper is still well above the marginal costs of most producers which are in the $6,000 – $7,000 a tonne range or roughly $2.75 – $3.15 a pound.

Copper has stayed at these relatively lofty levels thanks to largely static supply in global markets for a number of years.

But a slew of new mines in Indonesia, Peru and Mongolia coming on stream and expansion at existing mines in number one producer Chile this year will result in a 6.4% jump in mine output the International Copper Study Group estimates.

Australia’s closely watched official forecaster this week also pointed to a growing surplus and a decline in prices.

The Bureau of Resources and Energy Economics predicts average copper price to decline 4% to around $7,778 a tonne in 2013 and continue to slide to reach $7,100 five year from now.

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