Just six months ago, before the tsunami hit, the longer term outlook for metals was strong. Sure, there were some concerns that demand would ease given the downturn in automotive, housing and construction within the United States, but the assumption was that the greatest damage would be contained within the U.S. Further, it was thought that regions had decoupled, with Asia, and China in particular continuing to support the ‘Super Cycle’ theory. To this point, last August when we reviewed price forecasts for 2009, the expectation was for prices of most metals to ease marginally from 2008, with aluminum being the exception as it was forecast to continue rising. As the song says “I wish I didn’t know now, what I didn’t know then.”
Clearly, the world has changed, and with it, market sentiment, like the pendulum that has swung from one extreme to another. Over the past several weeks a number of analysts and market participants have voiced their opinion on the future of copper prices, and Reuters conducted another poll. As might be expected, there is a wide range of views.
From the bears, falling demand and rising inventories will continue to weigh on prices for several years to come, with some looking for copper to fall well below the $1.00 level. Conversely, those with a more optimistic outlook (they used to be called bulls), see the market steadying up going forward. Their argument is based on financial stimulus packages throughout the world helping the demand side, while announced and anticipated production cuts are expected to reduce output, and prevent a more serious buildup of inventories.
Obviously, there is validity to either side of the debate, but the simple fact is - no one knows what the future will bring. Last August the consensus of opinion was for copper to average $3.51 in 2009. Today the price is half that level, and it is doubtful that anyone anticipated the speed, or depth of descent that occurred. Here is the new Reuters survey:
Jan. ’09 Avg. 2009 F 2010 F
Copper $1.48 $1.58 $1.96
Aluminum $0.64 $0.74 $0.90
Lead $0.51 $0.52 $0.60
Tin $5.15 $5.49 $6.38
Nickel $5.13 $5.09 $6.14
Zinc $0.54 $0.57 $0.70
Notice that with the exception of nickel, prices overall are forecast to move higher, despite rising inventories over the past few months. It is worth noting that aluminum inventories held in LME warehouses rose some 475,000 MT to close January at a record high 2,803,650 MT, while copper stocks held in Comex and LME warehouses rose 157,180 MT, representing their second largest increase on record, and bringing the total up to 528,030 MT, the highest since January 2004.
Given the widely differing views of the copper market, it comes as no surprise to see equally divergent opinions among the 56 analysts who were polled. The highest forecast expects copper to average $2.36 in 2009, with the lowest coming in at $1.08 - that’s a range of $1.28. Looking ahead to 2010, the consensus believes that prices will be higher, but the spread is still wide with the high forecast at $3.40, as compared to $1.25 on the downside.
Recognizing the continued weakness in virtually every sector of our economy, underscored by the relentless rise in lost jobs, it is with little wonder that consumption of refined metal in the U.S. is off more than 10% through October as compared to the first ten months of 2007. Globally though, both production and consumption remain above the year ago level, but this is due in large part to revisions of Chinese figures for 2007. Nevertheless, we expect both production and consumption statistics to show a substantially lower year-over-year level of activity by the time final 2008 figures are published. Further, while the market generated a 158,000 MT surplus through October, we will expect the full year figures to be well in excess of 200,000 MT, marking the third consecutive year of surplus that will total some 760,000 MT between 2006 and 2008.
Price forecasting is a difficult endeavor. The best that one can do is analyze the trends in place, review and apply anecdotal evidence, and examine history for some help. The problem is further compounded by numbers that don’t add up nice and neat as we would like. For example, basis the International Copper Study Group reports, the global market generated a surplus of some 467K MT of refined copper from 2005 to 2007, while inventories held in Comex, LME and Shanghai warehouses rose just 114K MT. The vast majority of the difference, some 390K MT showed up as additional inventory based on revisions to China’s statistics just a few months ago, coinciding with the freefall in prices.
Where Do We Stand Now?
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