Copper Rout Outpaces Analysts Focused on Shortages: Commodities

By Maria Kolesnikova and Agnieszka Troszkiewicz - Sep 30, 2011 6:01 AM GMT+0700
Enlarge image

A file photograph of workers standing near stacks of copper plates produced at Erdenet Mining Corp.'s copper processing plant in Erdenet, Mongolia, 360km northwest of Ulaanbaatar. Photographer: Danfung Dennis/Bloomberg

Molten copper is poured into molds at the Tongling Nonferrous Metals Group Holdings Co. smelter in Tongling, China, March 29, 2008. Photographer: Natalie Behring/Bloomberg News

The biggest rout in copper since the global recession drove analysts to cut their price forecasts by 16 percent in a week as mounting concern about growth eroded expectations for supply shortages.

The metal may drop as much as 10 percent to $6,500 a metric ton by Dec. 31, according to the median in a Bloomberg survey of 16 analysts and traders. Their estimate was $7,773 a week ago. Speculators in U.S. futures are making the biggest wager on declining prices in more than two years, U.S. government data show. Barclays Capital cut its forecast for the shortfall in global supplies four times since April and Deutsche Bank AG is anticipating a surplus as early as next year.

Commodities tumbled into a bear market this month, dropping 21 percent since April, on concern that slowing growth will curb demand for raw materials. Prices had more than doubled since the beginning of 2009 as surging consumption led by emerging markets created shortages in everything from corn to copper to crude. As many as 5,000 merchants will gather in the British capital from Oct. 3 for London Metal Exchange week, an annual event during which supply contracts are discussed.

“If you don’t have demand then you don’t need to talk about shortages,” said Robin Bhar, an analyst at Credit Agricole SA in London who has followed the metals market for about 25 years. “This is not a normal market. There is a lot of fear out there. At the moment people are panicking. When you panic, you don’t think rationally.”

Quarter Century

Copper, which reached a record $10,190 on the London Metal Exchange in February, sank to $6,800 on Sept. 26, a 14-month low. The contract closed at $7,230 yesterday, taking this year’s decline to 25 percent. The metal is on track for its second- worst year in almost a quarter century, exceeded only by a 54 percent retreat in 2008.

The Standard & Poor’s GSCI gauge of 24 commodities fell 3.6 percent this year, led by cotton, copper and nickel. The MSCI All-Country Index of equities dropped 14 percent. Treasuries maturing in 10 years or more returned 24 percent, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.

Copper consumption fell 0.9 percent in 2008 as the global economy contended with recession, driving supply into a surplus from a shortage, Morgan Stanley estimates. Global stockpiles in warehouses monitored by exchanges in London, New York and Shanghai expanded 15 percent to 652,281 tons since the start of January, a sign that demand may be weakening. Inventories are about 50 percent higher than the average over the past five years, data compiled by Bloomberg show.

Consuming Nation

This year’s gain in stockpiles still falls short of the expansions seen during the global recession, when they rose 63 percent in 2008 and 78 percent in 2009. Monthly imports by China, the biggest consuming nation, rose 58 percent since reaching a 2 1/2-year low in May, customs data show.

While China’s economic growth will slow to 9.3 percent this year from 10.4 percent in 2010, it will still be almost six times faster than the U.S., according to the median of as many as 66 economists’ estimates compiled by Bloomberg. China accounts for about 38 percent of global copper demand, compared with 8 percent for the U.S. and 15 percent for Western Europe, Morgan Stanley estimates.

The International Monetary Fund cut its global growth forecasts to 4 percent for this year and next on Sept. 20, compared with earlier estimates of 4.3 percent for 2011 and 4.5 percent in 2012. That would still exceed the 5.2 percent contraction in gross domestic product that the World Bank estimates took place in 2009.

‘Different Today’

“So far in the real economy we’ve seen some caution and less orders,” said Herwig Schmidt, head of sales at Triland Metals Ltd., one of 12 companies trading on the floor of the LME. The exchange handles about 80 percent of global transactions in metals futures. “But you don’t see the impact like we had seen in 2008 when suddenly 50 percent of all orders were canceled. It is different today.”

Prices will advance to a record $11,000 in 12 months as growth in emerging markets “suggest tightening copper fundamentals,” Goldman Sachs Group Inc.’s team of commodity analysts said in a report Sept. 22. The bank is recommending investors buy the LME’s June 2012 contract.

Production in Chile, accounting for about 17 percent of global refined supply, will probably decline this year because of snowstorms and strikes, Mining Minister Hernan de Solminihac said in a Sept. 5 interview.

Pipes and Appliances

Not everyone expects the shortages to persist. Supply may fall 140,000 tons short of demand this year, moving into a 120,000-ton surplus next year, Deutsche Bank said in a report Sept. 28. That’s enough metal to make wires, pipes and appliances for about 600,000 U.S. homes, according to the Copper Development Association.

Barclays Capital anticipates a shortfall of 639,000 tons this year, down from a March estimate of 889,000 tons. With the exception of June, when the bank widened its deficit forecast, the estimate has been cut every month since April. Barclays’ commodities analysts expect a deficit of 275,000 tons in 2012.

Money managers held a net-short position of 6,672 U.S. copper futures and options by Sept. 20, Commodity Futures Trading Commission data compiled by Bloomberg show. That’s only the third week this year the net position has been a bet on declining prices.

Buyers meeting for LME week may be more cautious in their orders this year, said Steve Hardcastle, head of client services for industrial commodities at Sucden Financial Ltd. The company is one of the biggest shareholders in the LME, which on Sept. 23 said it had received several “expressions of interest” that may lead to a takeover.

Manufacturing Output

Manufacturing in China may shrink for a third month in September, according to a preliminary index of purchasing managers from HSBC Holdings Plc and Markit Economics released Sept. 22. Euro-area services and manufacturing output contracted for the first time in more than two years in September, Markit Economics said the same day.

U.S. housing starts dropped 5 percent to a three-month low in August, the Commerce Department said Sept. 20. Construction accounts for 25 percent of copper demand, the Copper Development Association estimates.

“It is remarkable how long copper had stayed at elevated levels, but now everyone is just giving up on everything at the slightest smell of risk,” said Arne Lohmann Rasmussen, the head of rates, foreign exchange and commodities strategy at Danske Bank A/S in Copenhagen. “Even with lower growth in 2012, the picture still looks promising for some commodities, but we have to go through this phase of very high volatility.”

To contact the reporters on this story: Maria Kolesnikova in London at mkolesnikova@bloomberg.net; Agnieszka Troszkiewicz in London at atroszkiewic@bloomberg.net

To contact the editor responsible for this story: Claudia Carpenter at ccarpenter2@bloomberg.net