Copper prices, unlike its peers, have not grabbed much attention even though its price crash has been equally dramatic. Credit Suisse expects that supply will be the key differentiator as prices continue its downfall
Commodity prices have been in a correction mode in the past few weeks, with gold and crude oil already in a downward movement. But one metal that has not caught the eyes of investors is copper. The stockpile of copper recently breached a 10-year high on the London Metals Exchange (LME); the price has been trending down, below $7000 per tonne. The report sounds an even more cautious tone when it states: “Risks are also skewed towards the possibility of a deeper correction or undershoot, borne out by combined effects of structurally moderated demand growth and a long overdue delivery of abundant supply expansions for the first time in several years.”
Credit Suisse expects copper prices to trade towards $6,000 per tonne. Their report titled ‘Copper: Another One Bites the Dust’ states: “However, this time we feel that the move lower is likely to be structural in nature. In essence, after trading closer to the top of the $6,000 to $9,000 range in place since 2006, we now expect prices to gravitate towards the bottom end of that band.”
The reason for the pessimistic forecast is two-fold; firstly, supply has increased which resulted in record stockpiles. Secondly, a ‘structural downshift’ from China has resulted in weak demand. The confluence of the two has resulted in a crash in copper prices. Credit Suisse mentions that China demand has weakened so much that its growth rate is likely to settle at around single digits range of 7%-8%.
Additionally, the global investment bank mentions that any upward movement in price, perhaps due to European recovery, would be temporary and a good opportunity for short-term traders. The report states: “European road to recovery will be long and bumpy, is likely to see many industrial commodity prices move to a lower equilibrium, with any near-term bounce providing a new selling opportunity.”
More important than demand is the question of supply that has led to record stockpiles. The report states: “Copper’s price fortunes hinge more importantly on prospects for supply growth, rather than demand”. Steady expansion and investments in efficiency meant that supply is more ready than ever, with fewer levels of mine disruptions. The report states: “If, as seems quite plausible, miners suffer a lower level of disruptions and delays than in recent years, and expansion targets are more closely met, supply surpluses will inevitably rise.” Chile is one of the world’s largest producers of copper, yet the prevailing sentiment there is bearish as well.
Copper is an important commodity for several reasons. Firstly, it is a key material for electrifying homes, so it can be used as a barometer for gauging economic performance. Second, much of the world’s copper supply is consumed by China. Any small blip on the demand side from China is bound to affect copper. While the price has fallen to this level several times in the past couple of years, on each occasion the dip proved relatively temporary. However, this time around, we feel that the move lower is likely to be structural in nature, the report said.
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