Resident copper idiot Swale would never present this side of the story:
The biggest rally in copper in three months is reversing as analysts predict that the largest glut in 13 years will overwhelm consumption from an accelerating Chinese economy, which uses two in every five tons.
Production will exceed demand by 408,000 metric tons next year, the most since 2001, compared with 167,000 tons in 2013, the average of 15 analyst estimates compiled by Bloomberg shows. Futures rose 3.2 percent in August, the most in three months, on signs of an expansion in Chinese manufacturing. Prices will drop 6 percent to $6,800 a ton by the end of December, the median of 13 analyst and trader predictions shows.
Copper is falling with all other metals this year after a decade when prices rose fivefold. Producers from Rio Tinto Group to BHP Billiton Ltd. added 3.4 million tons to output since 2003, about what Europe uses in a year, and Morgan Stanley expects another 4.1 million tons by 2017. While prices are 29 percent below the record set in 2011, they are still about 50 percent higher than what the costliest mines need to break even, Macquarie Group Ltd. estimates.
“We’re having this big wave of copper supply growth,” said David Wilson, an analyst at Citigroup Inc. in London who has followed metals for almost two decades. “The underlying data in China is OK but it doesn’t suggest surging demand. Mine projects and refinery expansion projects that are happening at the moment are not going to get stopped.”
Copper for delivery in three months fell 9.1 percent to $7,209 a ton this year on the London Metal Exchange, as the LMEX index of six industrial metals declined 11 percent and the Standard & Poor’s GSCI gauge of 24 commodities advanced 1.6 percent, led by crude oil and cotton. The MSCI All-Country World Index of equities gained 7.8 percent and the Bloomberg U.S. Treasury Bond Index lost 3.3 percent.
Futures rebounded from this year’s loss of as much as 17 percent in part because of disruptions including mining accidents, a refinery outage and declining supplies of scrap metal in China. Some of that is now reversing, with Freeport-McMoRan Copper & Gold Inc. (FCX) saying yesterday it ended force majeure on deliveries from the world’s second-biggest copper mine, Grasberg in Indonesia, after the collapse of a tunnel in May halted work.
Supply from refineries will advance 5.2 percent to a record 21.84 million tons next year as consumption expands 2.8 percent to an all-time high of 21.42 million tons, Morgan Stanley estimates. Prices rose since June mainly because traders bought contracts to close out bearish bets and investors should take advantage of the rally to sell because the surplus will widen over the next 12 months, Macquarie said in a report Aug. 30.
Hedge funds and other speculators reduced short contracts wagering on a decline in eight of the past nine weeks, U.S. Commodity Futures Trading Commission data show. They also increased their long contracts in six of those weeks, having been the most bearish in at least seven years in April. They now hold a net-long position of 13,043 futures and options, about three times the average over the past five years.
A gauge of manufacturing in the 17-nation euro area exceeded 50 in July for the first time in two years, signaling expansion, and rose again in August, London-based Markit Economics said Aug. 1 and yesterday. The single-currency bloc emerged from a record-long recession in the second quarter. U.S. factory output rose at the fastest pace in more than two years in July. Europe accounts for 17 percent of copper demand and North America 11 percent, Barclays estimates.
Chinese consumption will expand 10 percent this year, from a previous estimate of 8.9 percent, Barclays Plc said in an Aug. 23 report. Inventories held in bonded warehouses in the nation fell about 70 percent to 300,000 tons since the start of the year, Glencore Xstrata Plc said Aug. 20. The world’s biggest commodities trader estimates global demand exceeded supply by more than 600,000 tons since the start of January.
China imported more refined copper in each of the three months through July, when shipments reached a 10-month high, customs data show. A manufacturing gauge rose to a 16-month high in August, the National Bureau of Statistics and China Federation of Logistics and Purchasing said Sept. 1. A separate purchasing managers’ index from HSBC Holdings Plc and Markit Economics yesterday had the biggest gain in three years and the first reading above 50 since April.
Economists surveyed by Bloomberg anticipate Chinese economic growth of 7.5 percent this year, the weakest since 1990, and 7.45 percent in 2014. Morgan Stanley says China will use 4 percent more copper next year, compared with a gain of 9.1 percent in 2013.
While stockpiles in warehouses monitored by the LME fell 11 percent to 589,750 tons the past two months, they are still 84 percent bigger than at the start of the year and may exceed 1 million tons in 2014, Macquarie estimates. Orders to remove metal from storage fell 23 percent in July and August, LME data show. Inventories tracked by exchanges in London, New York and Shanghai jumped 32 percent since the start of January.
New mines and expansions to existing ones will keep adding supply. Second-quarter production grew a higher-than-expected 8.4 percent, Citigroup Inc. said in a report Aug. 21. Ores globally are yielding an average of 6.55 kilograms (14.44 pounds) of metal for every ton of rock, compared with 6.47 in 2012, according to CRU, the London-based research company.
China will increase production of refined metal by 14 percent to 7.68 million tons next year, or 35 percent of global supply, Barclays estimates.
Escondida in Chile, the largest copper mine, produced 28 percent more metal in the 12 months ended in June, Melbourne-based BHP Billiton said in July, attributing some of the gains to higher average ore grades. Shares (BHP) of the company, which gets 18 percent of its revenue from industrial metals, dropped 4 percent to A$35.62 in Sydney trading this year and will reach A$38.69 in 12 months, the average of 18 estimates shows.
Aurubis AG (NDA), the world’s second-largest producer of refined copper, said Aug. 13 that its earnings for 12 months through September will be “significantly down” and predicted a price of $7,000 “for the foreseeable future.” Shares of the Hamburg-based company dropped 17 percent this year in Frankfurt trading. Those of London-based Rio Tinto declined 13 percent.
Freeport, based in Phoenix, will report a 16 percent drop in net income to $2.56 billion this year, the mean of 10 analyst estimates compiled by Bloomberg show. Copper accounts for 79 percent of Freeport’s revenue. Shares of the company fell 12 percent to $30.22 this year and will reach $35.82 in 12 months, according to the average of 17 predictions.
“China’s demand has been more robust year to date than western investors had appreciated,” said Duncan Hobbs, an analyst at Macquarie in London. “It’s perhaps a big ask for China to continue to buy at record levels. The balances in the market remain quite comfortable. In copper, over the course of next year the surplus will build.”
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