BMO forecasts poor copper demand, market correction over next few months
BMO Capital Markets Global Commodity Strategist Bart Melek said he agreed with the consensus at the CESCO World Copper Conference that copper demand will be poor and that the copper market may correct over the next few months.However, Melek added, "the price correction is unlikely to test recent lows as financial conditions are improving and secondary supplies are sliding due to relatively low prices.""Global copper demand estimates are universally pessimistic and range from Codelco’s (Chile’s largest producer) 4% decline to CRU’s estimate of a very sharp 15-20% drop," he said. "The fall in semi production, plunging global exports and the sorry state of construction activity (especially residential) are the key reasons for the pessimism."On the supply side, Melek noted, "global mine output is seen to be flat or falling by several percent due to a poor price and financing environment."Melek said scrap copper emerged as one of the "big stories at CESCO, partly due to data uncertainties in this sector and the large impact it can have on the supply/demand balance. Scrap supplies are dropping sharply, which is helping to partially balance the market along with moderating mine output, but forecasts are difficult."The scrap market is estimated to be roughly eight million tonnes and is believed to be a key driver responsible for the copper price rally during the first quarter of this year, along with recent Chinese official sector purchases. Scrap output may fall by more than one million tonnes this year probably due to poor manufacturing activity and low copper prices, Melek advised,BMO "sees fairly strong strategic buying of the metal from China in order to rebuild the stocks depleted over the last several years (metal will be needed for China’s aggressive infrastructure program as well) and to hedge its foreign reserves against possible unfavourable currency moves in the future."Nonetheless, Melek believes the Chinese copper buying isn’t enough in the short term to keep the copper price rally alive.However, if prices stay at current levels, Melek said mine production is expected to remain steady. "With prices presently at the US$1.80-plus per pound level, high-cost producers are not forced to shut operations as fast as they should in order to balance the market. The cost curve has shifted lower due to lower energy and sulfuric acid prices making most producers profitable."Melek forecast that demand from China and the developing world should return copper to a firm growth trajectory while western demand is anticipated to improve as well. "Production growth, however, may be restricted by relatively low prices, demand concerns and difficult financial market conditions. As such, the supply/demand balance may remain tight with the potential to move prices materially higher, likely over US$2.00/lb," he advised."Very low interest rates, fiscal stimulus planned in key countries (U.S., China, Japan, EU and Russia) and an improving credit market are additional reasons likely to bring copper into US$2.00/lb territory in late 2009/early 2010," Melek concluded.