Improved Mine Output, Weak Demand To Pressure Copper Prices - GFMS

                      Growing negative market sentiment, along with rising warehouse stocks, mine supply and weakening demand, could weigh on copper prices, said a metals consultancy Tuesday.

Copper prices are weaker so far in 2013, and if selling pressure intensifies, Thomson Reuters GFMS said prices could fall to $6,500 a metric ton. However, the firm said it believes the red metal could spend most of the year within its recent broad trading range.

“The continued uncertainty surrounding the eurozone has recently been exacerbated by the eruption of the Cypriot debt and banking crisis. This, together with ongoing caution regarding the economic outlooks for both the United States and China, has helped to keep sentiment in the copper (and broader commodities) market on the back foot,” said Sanjay Saraf, head of base metals research and forecasts at Thomson Reuters GFMS. “Adding to this, on the fundamental front, has been a rise in global exchange stocks and in our estimate of copper inventories in Chinese bonded warehouses in 2012.”

Global mine production grew by 4% to 16.669 million metric tons in 2012 following two years of minimal growth, making 2012 output the highest annual increase since 2004, Saraf said. Also in 2012, world refined copper supply rose by 2% to 20.059 million tons, although this is a decline in the rate of growth versus the past two years.

Global consumption was up less than 1% year-over-year, to 19.845 million tons in 2012. The firm cited a sharp slowdown in the rate of Chinese demand expansion, with growth halving to 4% last year. Saraf said the economic problems in the European Union were also a major area of weakness.

Thomson Reuters GFMS said world copper consumption within the building construction sector fell 1% in 2012. The electrical and electronic products sector, which is the largest end-use segment, saw a 2% increase. This came from growth in demand from the power utilities sector in the emerging economies, and in particular China, they said. The consumer and general products sector saw consumption sliding 3% and was the worst-performing end-use segment in 2012, they said.

The lackluster demand and rising supply lead to the copper market being in a surplus of 214,000 tons last year, the firm said. They said there was an “implied increase” in off-exchange warehouse stocks, with most of those in China; this build has limited price growth for 2013.

The firm said while copper prices are having an impact on investors, Thomson Reuters GFMS also sees “a more risk-averse stance being adopted by many commodity and macro funds that trade copper, as well as the culling of proprietary trading at major investment banks, as extenuating factors.”

The investment activity will be an important driver of short-term market movements, they said, with current sentiment now negative. A stronger U.S. dollar has lent pressure, but the firm also noted the record high net-short position held by speculators in copper, according to the Commodity Futures Trading Commission. The position “exceeds that built at the height of the post-Lehman financial crisis, in early 2009, when the copper price was trading around $3,000/ton,” they added.

The global average cash cost rose 14% in 2012, to $3,527 a ton, as costs rose across the board. The marginal cost was measured at $5,512. This implies a 31% operating margin from the 2012 copper price of $7,950 a ton, although the firm said this is closing quickly.

“The economics of the industry do not look quite as attractive as they did perhaps only two years ago. This is already apparent from the decisions taken by some major producers this year in revising plans for new development projects,” they said.

Courtesy ; kitco News