As the annual copper industry CESCO week in Santiago draws to a
close, storm clouds are starting to gather that threaten to spoil
the metal's price strength, for a while at least.
Tightening measures in China, the ongoing sovereign debt
problems in a number of European economies, and oil and food
inflationary worries are all being touted as posing a serious
threat to the global recovery. Add into the mix the problems facing
Japan following the tragic quake and the unrest in the Middle East
and North Africa region, and even then most confident of copper
bulls is admitting the market could be due a pull back.
The mood of industry participants in Chile this week is
cautiously bearish in the short term, and optimistically bullish
further ahead.
While miners continue to bang the drum of support for long-term
copper price strength, more and more producers are even starting to
do the unheard of, and voice their near-term concerns publicly.
The general director of Polish copper producer KGHM Polska Miedz
SA (KGH.WA) told Dow Jones Newswires that a number of risks could
spoil the party in the near term.
"I do believe in the long-term copper price but because of
several factors in the current situation, I'm very cautious about
the short term," he said.
"There are some risks to copper prices from the unresolved
situation in European countries, and a reluctance there to
implement austerity measures," he said. "China recently decreased
its purchases of copper, and we already are seeing the impact of
the country's tighter monetary policy. It could have a short to
medium term impact," he added.
Similarly the chief executive of Codelco, the world's biggest
copper producer with output of around 1.69 million metric tons last
year, said that attempts to rein in rising inflation is the biggest
risk right now to the market.
"The bigger concern in China now is inflation--food and oil
price inflation could be reaching levels where the government wants
to cool the economy, and this will have an impact on copper," Diego
Hernandez said in an interview.
Even before these risk factors started to accumulate, near-term
sentiment toward copper had started to turn a little sour.
The metal has staged a dramatic recovery since the economic
downturn in 2008 crimped demand in its key consuming markets like
housing and construction. Prices have more than tripled, and
recently peaked at a record high above $10,000 a ton.
This is against a backdrop of still-recovering demand in Europe
and the U.S., and slowing imports from China, the world's biggest
copper consumer.
Inventories in warehouses are rising, and stocks in China have
rapidly increased, particularly in bonded warehouses, where the
traditional practise of purchasing dollar-denominated copper as a
means to get credit has been well-used of late.
The accumulation of stocks in these bonded warehouses may now
start to come back to haunt its owners, with reports that China has
tightened rules on repatriating foreign currency from the re-export
of the metal. This move may mean the accumulating stocks will be
now sold and consumed domestically, cutting import demand in the
process.
The longer-term bull story shouldn't be underrated, however.
Miners in Santiago reiterated that short-term moves in copper
prices bear little relevance to any bigger picture investment
decisions they make, citing long-term Chinese demand and
contracting supply.
The chief executive of Freeport McMoRan Copper + Gold (FCX) said
that he's unconcerned about a slight damping of demand from Chinese
consumers.
"It's not like China's fallen off a cliff--it's still consuming
a lot of copper," Richard Adkerson told Dow Jones. "In the long
run, China's need for copper is going to be significant, and I
remain very optimistic about demand from the country, while being
aware of short-term scenarios that can impact prices," he
added.
It's because miners don't base their long-term decisions on how
to build their portfolio of operations on intra-day copper price
moves, that they appear relaxed at the prospect of a decline in the
metal at some point. Costs have risen significantly, and this puts
a further floor under prices.
Rio Tinto PLC (RIO) copper head Andrew Harding said the company
puts its large, long-life project decisions in the same time frame
as its market view.
"The important factor remains Chinese demand, and whether the
country is in it for the long haul. There's nothing that says it
(China) isn't," he said. "We'll always get short-term issues like
slightly weaker demand from China for a period, or building stocks,
but it doesn't matter--we don't live from day to day or even month
to month," he added.
Miners are also pointing to the need for China to keep its one
billion-plus population happy. Bernd Drouven, the chief executive
of German copper producer Aurubis AG, said China is committed to
building its country and managing the discrepancy between rural and
urban populations, "or it will face a real problem."
"China is fully aware of this, so it's building the
infrastructure it needs, and this requires electricity and
therefore copper in power transmission. If they can't give
employment, the minimum they can give is a TV. Where's the decline
in demand?" he added.
Yet while bullish on demand, Drouven said the decline in copper
ore grades isn't the huge constraint on supply that it's made out
to be, but helps vested market interests support high copper
prices. According to Drouven, the much-talked about issue of ore
grades poses no problem to smelters and doesn't limit production of
copper cathode.
"All miners have an interest in high copper prices, so the best
thing is to say we won't have sufficient copper supply due to
declining grades," he said.
Fabricators have reacted to the high prices by looking at ways
to substitute copper with alternative, cheaper materials, such as
aluminum and plastics. A senior vice president at copper consumer
Luvata told Dow Jones recently that there's now a "fundamental
disconnect between supply and demand and the copper price." This is
eating into consumption, Justin Roux said, and forcing Luvata to
look at using aluminum--a quarter of the price of copper--in
refridgeration.
How these factors play out in the short term remains to be seen.
Some of the risks touted may never gather momentum, and the cracks
appearing in China's economic growth story could be healed as
rapidly as they have appeared.
What is clear is that industry participants say they wouldn't be
surprised if they woke to find copper a couple of thousand dollars
lower, something that isn't out of the question given the volatilty
of late and the battle being fought between market longs and the
players holding large, and increasingly painful, short
positions.
If and when a sell-off correction does occur, it will be far
less of a surprise to banks, traders, hedge funds and industry
executives than it would have been a few months ago, with consensus
that the love affair with copper is still broadly intact.
-By Andrea Hotter, Dow Jones Newswires; +44 (0)20 7842 9413;
andrea.hotter@dowjones.com
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