Copper prices may go below $6000 / ton – Weak Fundamentals

According to a majority of analysts at the industrial conference held at Santiago, increasing supply (mine production) and events of China could send copper prices (LME quarterly futures) down to $6,000 / ton in the latter part of this year lowest since the Lehman Bros. global financial crisis of 2008.

Quarterly futures prices declined to $6617 / ton. The Chinese government has instructed the national development and reform commission to investigate how companies are doing bond processing.

Due to this, there was a major unwinding of long positions. YTD Copper has performed badly among base metals with a 10% decline. Market is mainly worried about the Chinese weakness. If more companies would default on bond payment then prices would decline.

According to the international copper study group (ICSG), first time since 2001, market may be over – supplied. In the annual survey report presented before the Santiago conference, Thomson Reuter GFMS consultancy stated that now time has ripen to make delivery for the mines which made investment during the 2011 boom. Given this, the market is entering into ‘the strong supply growth’ period. It is also fact that those big mining companies still earn profit, but small producers are compelled to close production as they are facing losses. After Chile, production has increased in Congo and Zambia and during 2013 mine production increased by 8% and estimated to be at 17.8 million ton, which would be highest in this decade.

During last year the raw metal market for refined metal remained balanced due to big Chinese demand, severe shortage of scrap and delay in the processing of copper concentrates. According to the GFMS consultancy, during 2014, the market would be surplus by 0.4 mt i.e. about 2% of the global consumption. It also notes that at the end of February, 1 mt of inventory at the bonded warehouse in the coastal Chinese cities. Changes in the rules for the bonded warehouse stock would be spoiling the calculation of demand supply of the entire world. Moreover, attention has to be paid towards the more than double stock lying at three major global warehouses.

If the Chinese economy would deteriorate more than expected, copper inentories in China would be liquidated globally and consequently prices would start crashing. The main concern would be traditional consumption demand of China and the commodity lying in finance deal (which we call badla finance), which would expose the market. Copper consumption growth in the Chinese construction and electronic industry during 1992 was at 8% and during 2012 it increased to 41%. The calculation about how much percentage this rate would go down would also push the prices downwards.

Disclaimer: The above post contains personal views and under no circumstance should it be construed as investment advice. As usual, conduct your own due diligence.

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