Study: Copper surplus likely to push price down to $2.75 a pound

The fear trade

After a 9% drop in the price during 2013 and a double digit decline so far this year, the outlook for copper just got a little bit darker still.

The closely-watched Thomson Reuters GFMS Copper Survey launched during the industry’s biggest annual event, CESCO Week in Santiago Chile, forecasts a period of surpluses as global mine supply ramps up.

The annual average price is expected to fall below $7,000/tonne in 2014 for the first time since 2009, with a test of the $6,000/tonne level deemed likely over the second half.

The copper market mostly balanced in 2013 despite global mine production rising by 8% to 17.8 million tonnes, its fastest pace in over a decade thanks to marked expansion top producer Chile and the Democratic Republic of Congo.

Had it not been for robust demand growth, a tight scrap market and delays in processing concentrate into refined metal, a surplus would’ve been created according to the study.

Global copper consumption rose 4% in 2013, up from zero growth in 2012 and the fastest since 2010. The jump was mostly due to China where demand growth came in at 9% in 2013 from 4% in 2012.

GFMS said stockpiling of refined metal within China towards the end of last year also helped put a floor under prices.

More recent concerns surrounding slowing Chinese growth and the sustainability of the copper financing trade saw prices weaken further to near-four year lows in mid-March 2014.

Rob Smith, Senior Base Metals Analyst from the GFMS team at Thomson Reuters, said “whilst many commodities markets have been on the back foot of late, the copper market has been particularly susceptible to weakness given its heightened exposure to the Chinese market, through both traditional end-use demand as well as finance-related routes.”

Mine output is expected to continue to rise, keeping the market in surplus over the medium term, although rising capital costs, easing prices and a shift in mindset among mining companies towards one of constraint “could lay the foundations for renewed tightness later in the decade.”

Global exchange inventories fell by 83,000 tonnes in 2013, with drawdowns concentrated in the second half. This compares with Thomson Reuters estimated market surplus of 49,000 tonnes last year.

The apparent mismatch is attributed to a shifting of material to off-exchange locations within China over late 2013, a trend that continued into early 2014, according to the study.

Indeed, Shanghai bonded warehouse stocks have increased over recent months, reversing the drawdowns that took place during early and mid-2013, whilst material is also believed to have accumulated at other coastal cities.

A key factor leading to this stock shift has been the ongoing demand for copper for financing purposes, concerns over the sustainability of which contributed to a sharp sell-off in copper prices in mid-March.

Although Thomson Reuters see the most likely scenario as a continuation of such activities, albeit likely on a smaller scale than previously, such worries have added to the downside risks facing the copper market in light of prospects for improved metal availability going forward.