COPPER HAS 'BEAR' WRITTEN ALL OVER IT
By Ruma Dubey
Copper, the ubiquitous reddish metal is all important, omnipresent all around us. This metal is the indicator of the true economic state. When the economy is booming, copper prices zoom and demand is high and vice versa when it is in recession. The red metal goes under the moniker of “Dr Copper” given its ability to forecast the economy and its price movements show shifts in the world economy.
Right from the cable which carries your electricity to the car which runs on the road, your laptops and PCs and mobile phones, construction and realty, all have copper. And given its wide usage unlike any other metal, it is thus considered to be the barometer of the economy. China consumes almost 40-50% of the global copper output and when imports to China spikes up, everyone assume that the best times have begun. Number two consumer of copper is USA and third is Europe.
Thus every time there is talk of an economic recovery, eyes shift to copper – has the demand for the metal gone up to indicate this economic recovery? On 1st March 2013, copper prices fell to its lowest levels since 16th Nov 2012. And post the current Cyprus debacle, risk has gone up and its May contract dropped to almost 3% at $7545/tonne and other metals, aluminium and zinc have also slipped below $2000/tonne.
Those trading in copper metal have turned bearish with hedge funds betting big time on falling prices. As per data on the US Commodity Futures Trading Commission, bets on falling copper prices are higher than those expecting higher prices by a huge 7,172 contracts. And this bearish stance is a complete reversal from a very bullish forecast less than a month ago.
So what has changed so much since then? First and foremost, demand is expected to remain tepid, with USA planning to cut down spending, China also taking steps to temper its growth rate and Europe continuing to remain in the throes of recession. Thus on one hand there is falling demand and on other supply is expected to show a surge not seen in the past 13 years. And this is thanks to the seeds sown a decade ago. Many mining companies had invested money in new copper mining fields 10 years ago as at that time, demand was scorching high and there was fear that if the same trend continued, the world may soon run out of copper. And now, all that investment is ready to bear fruit, unfortunately at a time when demand is low. Many mines in Mongolia, Chile and Zambia will be extracting their first copper in the next couple of months and these mines could add 11% or 1.99 million metric tonnes of the metal into the market. And Credit Suisse has predicted that global copper output could reach 20.5 MMT by 2015. And this year itself, copper supply is expected to outstrip demand by 1,53,000 metric tonnes.
Thus based on these fundamental factors, copper prices seem to be headed south. But there are some who say that “technical” aspects created artificially could jack up the prices. Two institutions – JP Morgan and Black Rock has received the go-ahead to launch Exchange Traded Fund (ETF) backed by physical copper and this has been legally challenged by the largest industrial copper user, Southwire, the who has alleged that these ETFs could lock-in supplies and artificially drive up copper prices; the same way it did for gold. But one has to realize that copper is not gold and does not have the fancy like the yellow metal. Thus copper ETFs will not replicate the gold ETFs.
For now, it looks like the red metal could remain largely in the red, at least till US and Europe bounce back. Mining has a lot of uncertainty and not all estimations have always come true. Yet, for now the writing on the wall has “bear” written all over copper.