Copper Markets Are Still Decoupled From Reality

Includes: BHP, CU, JJC
by: Wildebeest

The International Copper Studies Group released its preliminary data for 2009 this week. Copper closed the year with a refined copper surplus of 365,000 metric tons, up from the 224,000 metric ton surplus in 2008. The final year surplus arose from a large drop in demand in the second half of the year after the market was in deficit in the first half of the year when China was stockpiling.

Copper usage in EU-15 countries, Japan, and the United States decreased by 20%, 26% and 19%, respectively.

As I have mentioned previously, amidst this backdrop of a surplus, production is predicted to increase 4.3% per year over the next 4 years. In recent weeks, wire services have carried stories with bullish quotes from analysts about expectations of higher copper prices due to a forecast deficit in 2010. It is notable that no information ever accompanies these stories outlining where the demand is going to come from to create the deficit other than vague sweeping statements about global growth.

If demand for copper globally increases by 4.3% this year then that balances the expected increase in supply. Another 2% growth in demand is needed to balance the current surplus. To put that sort of growth into perspective, the percent usage growth in recent years has been 7.1 %, -0.1 %, 2.2 %, 6.6 %, -0.9 %, 0.1%. So a deficit in 2010 would require booming growth in usage as occurred in 2007.

Last year was a strange year in that the collapse in demand from the developed world was matched by the increase in demand by China. But Chinese demand dropped off in the second half of the 2009 as prices rose.

There seems to be no reason to believe that China would embark on another stockpiling drive at current prices. Some sort of increase in demand from the EU, Japan and the USA will be expected in 2010 but enough to take copper into deficit? (Bear in mind also that U.S. copper usage has been in decline for a decade so the new normal for U.S. copper usage is lower than the good old days)


In summary, despite copper being in surplus and stockpiles rising, copper prices remain strong, essentially decoupled from the physical supply/demand fundamentals. Whether that is sustainable depends on what you believe is driving market sentiment. However, to predict that copper will be in deficit in 2010 requires some heroic assumptions that look to me like too much of a stretch. I am not considering buying any copper stocks until the price gets down toward the $2.50 range.

Hat tip to Josh Hoyt of Metallic Conversion Corp for useful discussions.

Disclosure: The author is long BHP Billiton (NYSE:BHP)

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