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Why China is the key to the future of copper in 2013

Keywords: Tags  copper, China copper, China, London Metal Exchange, Patrice Mohr, Scotiabank, BNP Paribas SA, Samuel Frizell

As analysts’ enthusiasm for the copper market begins to fade, observers are looking at the two factors that likely will have the largest impact on copper in 2013: Chinese consumption and global mine startups.

“The U.S. is going to bumble along,” a Britain-based trader said of the global economic outlook. “The key continues to be China and how rapid their consumption will be.”

Copper prices on the London Metal Exchange slipped from an average of around $8,810 per tonne in 2011 to a little more than $7,960 per tonne in December, a drop that had much to do with activity in China.

Chinese markets account for more than 40 percent of global copper consumption, according to Patricia Mohr, vice president and commodity market specialist at Toronto-based Scotiabank, and demand from warehouses in Shanghai can swing global prices. The International Copper Study Group expected global copper use to rise 2.6 percent in 2012; without Chinese consumption, it would have predicted a 1-percent decline.

“An awful lot of what inventory is around for refined copper is being held in China,” Mohr said. “If you look at exchange stocks on LME as a total, those stocks have actually declined (in 2012) despite the fact that they’ve increased on the Shanghai Futures Exchange.”

And unfortunately for producers, Chinese copper consumption appears to be slowing down. Chinese copper fabricators have been facing issues in market share and lower demand and have been running down their inventories, the Britain-based trader said. In 2012, Chinese consumption expanded at its slowest rate since 2006, according to Scotiabank. It forecast 6.3-percent growth last year, almost 2 points lower than in 2011, and believes that growth likely will level out at between 7.5 and 8.5 percent in 2013 and 2014.

What’s more, Chinese stocks often are unreported, making them a potentially unpredictable market factor. Large “hidden” Chinese inventories will stifle demand and play a large role in raising global supply. Paris-based BNP Paribas SA has estimated that as much as 2 million tons of unreported inventory have built up in China over the past four years, and analysts say at least 500,000 tonnes are sitting in private bonded Shanghai warehouses.

“How tightly that inventory is held is the key,” said the Britain-based trader, “and whether that inventory gets exported to the LME or not.”

As Chinese demand starts to weaken, a long-term supply glut could put downward pressure on the market by the end of 2013 as well. Many analysts say that global copper production will accelerate sharply despite the persistent problems producers have battled in recent years, including labor disruptions, declining ore grades and geopolitical unrest. New York-based INTL FCStone Inc. projects a 100,000-tonne deficit in 2013 compared with a 300,000-tonne deficit last year, and expects production to grow 3.92 percent this year compared with 2.52 percent in 2012. BNP Paribas forecasts a 100,000-tonne supply surplus in 2013 vs. a projected 300,000-tonne deficit in 2012, and the Britain-based trader anticipates a 90,000-tonne surplus in 2013.

Mines worldwide are picking up the production pace: Indonesia’s Grasberg Mine and Chile’s Escondida Mine likely will increase their production significantly by 2014 to a combined 500,000 tonnes, BNP Paribas estimates, and Zug, Switzerland-based Xstrata Plc’s new Antapaccay Mine in Peru, which began production in November, is set to produce 140,000 tonnes this year. Anglo American Plc said that it pushed up copper output at its Los Bronces Mine by 84 percent in the third quarter of 2012 and likely will produce 400,000 tonnes in 2013.

All the ramped-up production and new start-ups will lead to a 7.5-percent increase in global mine production, Mohr said

But analysts continue to be wary of the effects that political turmoil and declining ore grades might have on production. “There’s some downside risk (on production),” Mohr said. “There are some mines in the Democratic Republic of Congo (DRC) that I think may not start up as quickly as expected.”

A BNP Paribas report projects that Katanga Mining Ltd’s KOV Mine in the DRC is set to produce 200,000 tonnes of copper in 2013, but that figure may be threatened by the expanding civil war in the region; Chinese copper imports fell nearly 20 percent in October compared with the previous month due to strikes in Chile; workers at the Zambian mine run by Vancouver, British Columbia-based First Quantum Minerals Ltd. went on strike; and Zug, Switzerland-based Xstrata Plc’s Tintaya copper mining project and Greenwood Village, Colo.-based Newmont Mining Corp.’s Conga project in Peru saw serious labor unrest last year.

“A growing portion of supply over the next decade is going to be coming from increasingly risky locations,” said Gayle Berry, director of commodities research at Barclays. “It’s one of those things people don’t really take seriously in terms of actual production levels.”

“Copper mining is getting a lot more difficult,” one producer source said. “If there is a tip-up of global activity, copper prices are going much higher because there’s not a copper supply to feed the increase in demand.”

Michael Turek, senior director of London-based Newedge Group’s metals desk, said mining difficulties and declining ore grades could lead to copper shortages ahead. “My sense is that we have a long-term supply situation percolating in copper which I think is going to underpin the price,” he said.

Most analysts, however, say that producers will overcome supply difficulties and end up flooding the market in the long term, citing projections that supply will increase further after 2013. The global market is still tight enough to hold copper prices close below the $8,000-per-tonne level, most analysts predict. BNP Paribas forecasts a price as high as $8,500 per tonne, with an average of around $7,825, while Mohr sees prices averaging $7,890 per tonne this year. INTL FCStone pegs prices at between $7,200 and $8,900, with an average of $8,000.

But that strength could abate going forward, as analysts see increasing supply and decreasing demand in China slowly catching up to the market. “It depends on how cynical you want to be on whether the mines are getting their act together,” the Britain-based trader said.

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