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Published by J.E. Gross & Co., Inc. • P.O. Box 339 • Newport, RI 02840 • (401) 667-0478
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| Published 11 April 2009 |
Vol. XVII No. 4 |
Confounding...
Back in January when the price of copper began rising, the
question was posed, ‘what are the markets telling us’?
Since then, the price has moved up at an accelerated pace,
and although inventories have fallen over the past few
weeks, they are nevertheless still higher than at year end,
while the global economy is expected to decline anywhere
from 1.7% to 2.7% during 2009. If the forecast is accurate,
this will be the first contraction of the global economy
since World War II. Thus, it becomes increasingly difficult
to reconcile higher prices for copper within an
environment of slack demand. So, the question remains
unanswered, prompting us to speculate where the strength
in metal prices, and other commodities is coming from.
It has been clear for some time now that coordinated
stimulative packages launched by Central Bankers
throughout the world, totaling trillions of dollars will
ultimately have a positive impact, but it has not yet shown
up in the statistics. Could it be that the markets are
suggesting that the debate over inflation versus deflation
will be won by those expecting higher prices as a result of
the infusion of liquidity, and we are at the beginning of the
trend? Or are the markets being forward looking, on a leap
of faith, that economic strength will reemerge?
A quick glance at industrial production trends for major
economies (page 6) does not instill a sense of confidence
that things will turn positive anytime soon. Further, other
major copper consumers have seen their IP rates fall
sharply from the year ago period as well. South Korea, the
world’s fifth largest consumer posted a decline of 25.6% in
January; Taiwan was off 27.1%, with Turkey, Malaysia
and Thailand all down in excess of 20%.
In terms of GDP, only China and India are expected to see
positive growth this year, with expectations of +6.0% and
+5.0% respectively. The United States is forecast to
contract 2.2%; Japan -5.3%; Germany -3.2%; France
-1.9%; Italy -2.7%; South Korea -5.9%; Russia -2.0% and
Taiwan down 6.5%. Thus, of the ten largest consumers of
copper, comprising 74% of the global total, only two will
see growth, making it a tough argument to see prices
supported from the demand side.
With full year figures published for 2008, the International
Copper Study Group reports a surplus of 363K MT of
refined copper last year, on top of +286K MT in 2007 and
+265K MT during 2006. Accordingly, over the past three
years, 914K MT of excess metal has been accumulated.
For 2008 overall, as the graph on the last page illustrates,
global production rose 464K MT or 2.6% to reach a record
high 18.47 MMT, while consumption also posted a new
high as usage climbed 387K MT, or 2.2% to 18.11 MMT.
Of note, China led the gains on both sides of the equation
with a 329K MT, or 9.4% increase in production bringing
their output to 3.83 MMT, representing nearly 21% of
global supply. Excluding China, global production fell
0.9%. Elsewhere, the United States posted a 46K MT, or
3.5% decline in production, bringing the total down to 1.26
MMT, approaching the low of 2006, while Japan fell 37K
MT, or 2.3% to 1.54 MMT. Chile, the worlds second
largest producer of refined copper saw a 124K MT, or
4.2% increase, bringing their total to a record high 3.06
MMT.
On the consumption side, China led the way with a 648K
MT, or 14.2% increase, resulting in a new high of 5.20
MMT, and representing 28.7% of the global total.
Excluding China, global consumption fell 2.0% last year.
Within the United States, the second largest consumer,
usage of refined fell 185K MT, or 8.7% to 1.95 MMT,
while Japan posted a 68K MT, or 5.4% drop, with their
total falling to 1.18 MMT.
Looking ahead, uncertainty prevails. There is no doubt that
the stimulus measures will help demand, but the questions
are, when, where, and by how much? In the short term,
China is the key to the market, and their significant
increase of both scrap and refined metal being imported
seems to be the major factor supporting the market. That
said, it remains to be seen whether that metal will be used
for infrastructure development, and internal consumer
demand, or for building up additional stockpiles. It is
doubtful that a major portion of the metal will find its way
into goods for export given the obvious weakness in the
world economy and shrinking international trade. Changes
on the supply side are equally confounding as major
projects have been put on hold, and producers have
announced cutbacks due to lack of credit, weak demand,
mechanical, or labor issues. Assuming that global
production increases 1/2% in 2009 and consumption is flat,
we are still looking at some 400K MT of excess metal
being added to inventories. From this perspective too, it is
hard to justify higher prices. However, we do believe that
2010 will see a resurgence in demand, consistent with
expectations of positive GDP rates across the board, that in
the longer term will be supportive of a stronger market
based on the fundamentals.
Additional pages of this report can be found at the Copper Journal
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