(Kitco News) - Base-metals analysts are describing a Goldilocks scenario for copper in 2014 – not too hot and not too cold.
Production is expected to increase, but leave the market in only a modest supply surplus with demand that most analysts forecast to hold up although not be spectacular. Against this backdrop, most said they look for copper to remain largely range-bound in 2014.
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“I’m not super bearish. I’m not super bullish either,” said Leon Westgate, commodity strategist at Standard Bank, in an interview with Kitco News.
Bank of America Merrill Lynch, in its 2014 commodities outlook, said it was “neutral” on copper. This bank said it sees supplies growing, but global demand excluding No. 1 consumer China will offset some of an expected growth slowdown in China itself.
“As such, we believe copper is not too hot and not too cold, i.e. next year’s average may be close to quotations seen this year,” said BofA Merrill Lynch.
Edward Meir, commodities consultant with INTL FCStone, described a picture in which copper demand will grow but may be subpar or mediocre. Meanwhile, he said, supplies are “catching up” after the deficits of past years. Against this backdrop, he said he looks for copper on the London Metal Exchange to range mostly between $6,500 and $7,900 a metric ton.
Brian Hicks, co-manager of U.S. Global Investors’ Global Resources Fund (PSPFX), suggested the red metal could spend much of the year hovering around $3.20 to $3.30 a pound.
Three-month copper closed on the LME on Dec. 16 at $7,290 per metric ton. The most-active March futures finished at $3.3295 per pound on the Comex division of the New York Mercantile Exchange.
For 2014, Westgate listed an average price forecast of $7,200 a ton, as did INTL FCStone. TD Securities forecast $7,093, and BofA Merrill Lynch listed $7,013. CPM Group forecast $6,850, while Citi projected $6,650.
Prices could face a risk later in 2014 as supply keeps coming on line, said Hicks. Yet, he also looks for improved demand to underpin copper, with potential for an upside surprise if the global economy is stronger than expected or there are supply disappointments due to factors such as strikes or lower ore grades.
“Copper is very sensitive to the economy,” Hicks said. “When we see the economy pick up, that increases demand for copper.”
Westgate also looks for a largely range-bound market to continue, suggesting prices may fare best in the first quarter and slip later in the year as a surplus situation emerges. He pointed out that the ranges from the last two years ($1,744 for three-month LME copper so far in 2013) were far less than previous years. Prior annual ranges from 2008 to 2010 were from a little more than $3,000 a ton to a little more than $6,000.
“I think you will see a more range-bound market for another year until you get a better sense of how the global economy is doing,” Westgate said.
Meir said he looks for “sluggish demand and comfortable supply,” resulting in a refined copper surplus of 270,000 tons this year and 400,000 next year.
Westgate called for a surplus next year of nearly 300,000. “That’s not a massive surplus; it’s fairly modest,” he said. CPM Group listed 260,000. BofA Merrill Lynch likewise specified that it does anticipate a massive surplus, forecasting one of 534,000 ounces. Citi listed 539,000.
TD Securities, meanwhile, listed a forecast for a narrower supply surplus of 163,000 tons, calling for “healthy” demand growth of 5.1% to outpace supply growth.
Copper Demand Seen Rising
INTL FCStone looks for global copper consumption to rise to 21.35 million metric tons in 2014 from 20.73 million this year. The firm sees Chinese buying rising to 10.4 million from 9.65 million. CPM Group sees global consumption increasing to 21.87 million tons next year from 20.94 in 2013.
Global copper inventories near the end of 2013 are slightly below the end of 2012, Hicks pointed out.
“That’s in part why we’re seeing copper prices at fairly strong levels,” Hicks said. Comex March copper hit a six-week high in the second week of December, when Hicks spoke. “I think we’re continuing to see constraints with respect to processing. We still have a very strong physical market. It looks like copper is starting to move into backwardation as well.”
Backwardation is when nearby prices are higher than those for deferred months, meaning buyers are willing to pay extra to get metal right away.
“So we’re seeing some strong demand here recently,” Hicks continued. “I think if we do get a global synchronized growth pattern in 2014, copper prices could strengthen even further on better-than-expected demand.”
Positive demand sources, Hicks said, include improving auto sales in much of the world and continuing efforts by key copper consumer China to develop its power grid.
Copper Supplies Also Seen Higher
Copper output rose in 2013 and is expected to do so again next year, observers said.
For instance, Meir sees mine output up to 18.5 million tons in 2014 from 17.9 million. Refined production is seen up to 21.75 million from 21 million.
CPM Group calls for 2014 mine production of 18.86 million tons that would be up from 17.35 million this year. Refined output is forecast at 22.21 million, up from 21.1 million this year.
Some of gains were the result of projects started a few years ago when copper was soaring. The price more tripled to $8,940 a ton in the middle of 2008 from less than $2,000 at the start of the millennium. Prices fell back as far as $2,187.25 when the recession hit Western nations, but bounced back to a record of $10,190 in early 2011 with the help of strong Chinese demand, before falling back again.
“You have a lot of projects that were started in the boom years in 2007, 2008 and 2009 that are just coming on stream now -- even some projects started in 2011, when we had a mini-bull run,” Meir said. “These things take a couple of years to come to fruition, so you’re seeing that at work.”
Output in Chile, which is the world’s largest copper producer, is around 6.5% ahead of last year as the country avoids many of the supply issues of the past, such as labor-related output disruptions, Meir added.
There were some supply disruptions in 2013, such as a landslide at Bingham Canyon in Utah. Yet, overall, 2013 was a good year for mine production, Westgate said.
“There really haven’t been the really significant production shortfalls that have plagued copper over past years….It will be interesting to see whether the miners and producers have another (mostly) trouble-free run or whether they struggle once again,” Westgate said.
The pullback in prices since the 2011 peak does not seem to be curbing output materially, Meir added.
“Most miners are still profitable,” Meir said. “We think the cost of production is probably in the low $6,000 range. That’s a very general number; it varies from mine to mine.”
As a result, the copper price likely would find some support if it falls back to this area, Meir added. Presumably, this increases the potential for curtailment of unprofitable supply.
“Also, at that level, there is a tendency for scrap (supply) to dry up,” Meir said. “Scrap merchants don’t offer anything if prices are too low; they just sit on it. That also provides an element of support.”
By Allen Sykora of Kitco News; firstname.lastname@example.org