Weak Demand Inflates Inventories and Deflates Copper and Brass Prices
The status of the copper and brass market is evident from the steeper-than-expected 7.8% drop in U.S. manufacturing output in 2008—and the 14% decline in construction. That's why North American copper demand dropped by 7% last year (after dropping 5% in 2007). Demand could slide by another 5% this year since copper and brass purchasing trends are sensitive to the direction of the industrial and construction segments of the economy.
Global copper cathode prices dropped to an average $3.15/lb in 2008 from $3.25 the year before but the monthly slide took cathode prices to a low of $1.39 in December from a high of $3.94 in April. Similarly, U.S. Midwest copper cathode prices dropped to an average $3.19/lb in 2008 from $3.24 the year before but cathode prices hit a low of $1.49 in December from a high of $3.99 in April.
The world price of primary copper, the benchmark grade, tends to track global industrial demand. That's why the world price of primary copper traded on the London Metal Exchange (LME) has dropped 64% since it peaked last April. No surge in copper pricing is expected this year, as the world refined production is forecast to be up by only 1.4% in 2009—but global consumption growth will be just 0.3%.
"As the depth of the global recession becomes apparent, copper's surplus will widen out to as much as 400,000 metric tons in 2009," writes nonferrous analyst John Mothersole in the Washington office of IHS Global Insight. The 2008 regional collapse in demand has been matched by world reduction in purchasing that has created a visible surplus of metal that has filled London Metal Exchange (LME) warehouses with more than 387,000 metric tons in January.
These stockpiles of copper are equal to almost nine days of global demand, up from three days worth last summer. "Copper is down on people's views of the economy and demand," analyst Patrick Chidley at Barnard Jacobs Mellet in Stamford, Conn., told Bloomberg recently. "It is logical that higher inventories would be weighing on the price." The consensus forecast for 2009 copper cathode is $1.59/lb, according to a dozen analysts polled by Purchasing. But, the price may drop as low as $1.25/lb if consumption keeps declining, says William O'Neill at Logic Advisors in Upper Saddle River, N.J. "The demand-destruction situation continues to weigh on prices."
Even lower-priced copper in 2008 and early 2009 hasn't stopped the purchasing decline by a variety of end-use manufacturing sectors as automotive, building products and appliances household products. Kenneth Bender, a copper buyer at Hellenbrand in Waunakee, Wis., a manufacturer of residential water treatment equipment, agrees that "business is very slow with money very tight."
China is the largest global market for copper, followed by the U.S. One of the reasons global copper prices have tumbled is the indications that China's manufacturing sector has gone into freefall and demand for its exports plummeted.
In fact, "consumption data for the fourth quarter of last year shows a collapse in demand for all base metals," writes analyst Jim Lennon at Macquarie Group. "Right now, it appears unlikely that underlying consumption will recover significantly until the middle of the year at the earliest. So late 2009/early 2010 looks like a more likely timeframe." Lennon believes that "it will be more a case of prices bumping along the bottom in 2009 rather than falling dramatically."
The main factor that would drive an increase in copper prices remains the timing of an upturn in global economic growth, according to the analysts. They generally are expecting government stimulus packages in the U.S., China and various European nations to prop demand sometime in the second half of the year, probably the fourth quarter. Lennon says "it is hard to envisage a strong recovery in demand occurring until the end of 2009 at the earliest." That's why the market economists generally are forecasting that prices will pick up only marginally in the final quarter.
Basemetals.com analyst William Adams suggests that the proposed U.S. infrastructure rebuilding program could boost copper and brass demand later in the year. "If orders start to flow again on the back of public works spending, then fabricators and the whole supply chain, other than warehouses, might find themselves short of metal so there could be a bout of restocking by processors and fabricators," he suggests. However, he's not sure if or when such a buying surge might occur. Lennon of Macquarie Bank says "a look back to price performance in the 1990s suggests that it is an upturn in industrial production which will trigger a pick-up in prices (since) inventory changes tend to be a lagging indicator."
Some London traders reckon that Chinese copper buyers eventually will be forced to replenish their dwindling local supplies. Or, possibly, there will be a buy of 400,000 metric tons by China's State Reserves Bureau, as part of the country's $586 billion economic stimulus package. The copper buy would cost the country $1.5 billion at today's prices. However, Reuters is reporting that the bureau "may be losing its appetite for the industrial metal" at a time when Wang Chiwei, executive director of Jiangxi Copper, China's top refiner, now is forecasting the country's refined copper consumption will rise only about 2% this year.
Global copper cathode prices dropped to an average $3.15/lb in 2008 from $3.25 the year before but the monthly slide took cathode prices to a low of $1.39 in December from a high of $3.94 in April. Similarly, U.S. Midwest copper cathode prices dropped to an average $3.19/lb in 2008 from $3.24 the year before but cathode prices hit a low of $1.49 in December from a high of $3.99 in April.
The world price of primary copper, the benchmark grade, tends to track global industrial demand. That's why the world price of primary copper traded on the London Metal Exchange (LME) has dropped 64% since it peaked last April. No surge in copper pricing is expected this year, as the world refined production is forecast to be up by only 1.4% in 2009—but global consumption growth will be just 0.3%.
"As the depth of the global recession becomes apparent, copper's surplus will widen out to as much as 400,000 metric tons in 2009," writes nonferrous analyst John Mothersole in the Washington office of IHS Global Insight. The 2008 regional collapse in demand has been matched by world reduction in purchasing that has created a visible surplus of metal that has filled London Metal Exchange (LME) warehouses with more than 387,000 metric tons in January.
These stockpiles of copper are equal to almost nine days of global demand, up from three days worth last summer. "Copper is down on people's views of the economy and demand," analyst Patrick Chidley at Barnard Jacobs Mellet in Stamford, Conn., told Bloomberg recently. "It is logical that higher inventories would be weighing on the price." The consensus forecast for 2009 copper cathode is $1.59/lb, according to a dozen analysts polled by Purchasing. But, the price may drop as low as $1.25/lb if consumption keeps declining, says William O'Neill at Logic Advisors in Upper Saddle River, N.J. "The demand-destruction situation continues to weigh on prices."
Even lower-priced copper in 2008 and early 2009 hasn't stopped the purchasing decline by a variety of end-use manufacturing sectors as automotive, building products and appliances household products. Kenneth Bender, a copper buyer at Hellenbrand in Waunakee, Wis., a manufacturer of residential water treatment equipment, agrees that "business is very slow with money very tight."
China is the largest global market for copper, followed by the U.S. One of the reasons global copper prices have tumbled is the indications that China's manufacturing sector has gone into freefall and demand for its exports plummeted.
In fact, "consumption data for the fourth quarter of last year shows a collapse in demand for all base metals," writes analyst Jim Lennon at Macquarie Group. "Right now, it appears unlikely that underlying consumption will recover significantly until the middle of the year at the earliest. So late 2009/early 2010 looks like a more likely timeframe." Lennon believes that "it will be more a case of prices bumping along the bottom in 2009 rather than falling dramatically."
The main factor that would drive an increase in copper prices remains the timing of an upturn in global economic growth, according to the analysts. They generally are expecting government stimulus packages in the U.S., China and various European nations to prop demand sometime in the second half of the year, probably the fourth quarter. Lennon says "it is hard to envisage a strong recovery in demand occurring until the end of 2009 at the earliest." That's why the market economists generally are forecasting that prices will pick up only marginally in the final quarter.
Basemetals.com analyst William Adams suggests that the proposed U.S. infrastructure rebuilding program could boost copper and brass demand later in the year. "If orders start to flow again on the back of public works spending, then fabricators and the whole supply chain, other than warehouses, might find themselves short of metal so there could be a bout of restocking by processors and fabricators," he suggests. However, he's not sure if or when such a buying surge might occur. Lennon of Macquarie Bank says "a look back to price performance in the 1990s suggests that it is an upturn in industrial production which will trigger a pick-up in prices (since) inventory changes tend to be a lagging indicator."
Some London traders reckon that Chinese copper buyers eventually will be forced to replenish their dwindling local supplies. Or, possibly, there will be a buy of 400,000 metric tons by China's State Reserves Bureau, as part of the country's $586 billion economic stimulus package. The copper buy would cost the country $1.5 billion at today's prices. However, Reuters is reporting that the bureau "may be losing its appetite for the industrial metal" at a time when Wang Chiwei, executive director of Jiangxi Copper, China's top refiner, now is forecasting the country's refined copper consumption will rise only about 2% this year.
by Tom Stundza (source: www.purchasing.com)
