Copper prices slump to lowest levels and may slide further

If one were to track copper price and demand patterns to the exclusion of all other benchmarks, chances are you will still have a good indication of the state of the global economy. Anyone trying this out last week would have felt a cause for concern.

Benchmark copper prices slipped to their lowest level since early February to a shade over $6,600 (Dh24,235) a tonne on May 5, and market observers do not rule out a further softening. If the forecast comes to pass, it would be a telling blow for a metal which had seen prices recover past the $8,000 a tonne mark during the first quarter of 2010.

More tellingly, it wouldn't also say much about the prospects of the global economy in the near term. "Following a strong run up towards the $8,000 mark, copper prices have recently corrected amid rising fears of contagion of the sovereign debt problems in peripheral Europe and a stronger dollar," said Tobias Merath, vice-president and head of commodity research, Credit Suisse.

Underlying concerns

Greece has already erupted and each passing day of strife and turmoil on its streets would have consequences for the euro and, by extension, for the euro zone's manufacturing economies. Compounding the issue are underlying concerns over Spain and Portugal, both of which are beset by their own debt problems.

A battered euro would then have its own impact on short-term copper demand for European importers, which could lead to further volatility.

And then there's the great unknown as represented by the China factor. Authorities there have in recent weeks been tightening monetary controls to keep inflationary pressures at bay. This would have an immediate bearing on China's gargantuan appetite for base metals to feed its manufacturing industries.

Ironically, it was China — and the rest of Asia — which helped demand for copper rebound in the second half of last year.

But Merath believes copper market's "specific" fundamentals are still intact. "On a global scale, pick-up in demand is likely to out-pace the production ramp-up at the refining stage," he said in reference to data available as of end April. "The latest macro-economic data suggest that initial restocking activity at the end consumer stage has started to provide demand with fresh impetus."

One person who would clearly wish this would be the case is Francis Kane, president of International Copper Association, an industry grouping which aggressively promotes the use of the metal. According to its strategic plan, ICA would work to influence up to 1.2 million tonnes of copper demand during the five years from 2007 to 2011.

"Although there are concerns China is extending monetary tightening measures in the booming property sector, Asia's year-on-year decline of 1.9 per cent in copper consumption — due to reduced exports, deferred construction, delayed industrial investments and reduced private consumption — appears almost benign," said Kane.

"The copper industry has gained much momentum since last year, which witnessed significant financial pressures on the smelting, refining and fabricating segments in the copper value chain.

"The economic situation of manufacturing countries will obviously have repercussions on the global copper industry. But rather than a simplistic proposal of trying to reduce the gap between production and demand, ICA works with a bigger perspective and outlook.

"For example, in Europe the security and cost-competitiveness of energy supplies remain top items on the EU agenda. And the three key policy areas of energy efficiency, grid inter-connectivity and re-newables provide excellent growth opportunities for copper."

All of which is encouraging enough, but are more indicative of the metal's prospects over a longer term. It does not obviate concerns that a faltering euro and indifferent demand from China over the next few months would get in the way of stoking copper demand.

But there is a belief gaining ground the US could ride in to the rescue. Traditionally the largest copper market in the world, the US economy seems to be getting its act together over the last two quarters in particular. Key fundamentals are on the mend.

"There are signs of recovery," said Kane. "The opening of the Copper Innovation Centre in December 2009 — a joint public-private research centre — will have a global impact in driving demand for copper."

India

Then there's India, putting in some good growth numbers, and some of the other Asian markets who could pick up some of the slack if demand from China under-performs.

"The ‘new orders' component of global manufacturing Purchasing Managers' Index (PMI) continue to point upwards, coinciding with falling inventories at exchange warehouses and providing support for the view of on-going restocking," said Merath.

In layman's terms, this means demand is still out there. Now, only if China were to come to the party and work up an appetite for the metal.

Construction

If only the Middle East's construction sector had not taken a hit, substantial demand could have been generated for copper.

But Francis Kane of the International Copper Association believes the region's time will come. "The Middle East and North Africa has the potential to be one of the largest and fastest growing markets for copper led by the construction and infrastructure development sector," he said. "The building products sector demands more copper every year than any other market sector."

Kane was in Dubai to helm the Asia Copper Forum organised by the ICA. It's the first time the event is being held here and underlines the importance the GCC markets have in ICA's scheme of things to pump up copper usage.

While the construction sector remains the largest consumer, the building materials and power industries too are right up there. Others are finding uses for the metal.

"What is discernible is a perceptible vote of confidence by the largest consumers of copper on the long-term beneficial impact of the metal not only in the traditional sectors but also in solar energy and public health," said Kane.

On the supply side, Kane does not foresee any major initiatives to come in the near term. "We expect existing copper mine geographies to contribute to copper production in the short to medium-term," he said. "Copper is capital-intensive and involves environmental concerns. However, several concerted efforts are being made to address these including the Global Mining Initiative that addresses pressing regulations through self-regulation apart from mandatory governmental policies to protect the natural environment."