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Blog: Copper Prices to Fall, Remain Fair Through 2015

By Rosalyn Retkwa

This week, the dollar strengthened dramatically after the surprising announcement that the federal deficit was shrinking more rapidly than expected due to an improving economy and higher tax revenues. In fact, the Congressional Budget Office predicted that by 2015, the federal deficit will fall to $378 billion, or just 2.1 percent of gross domestic product, even if Congress doesn’t make any further spending cuts.

After that “God bless America” moment on Tuesday, as the dollar shot up, the price of copper was once again under pressure, with the three-month contract on the London Metal Exchange trading at $7,146 a metric ton on Thursday, up from its lows in April, but down by 9.9% year-to-date.

New York-based INTL FCStone metals analyst Edward Meir believes the price of copper is “going to take a stab at $7,000 next,” though he also noted in his Daily Base Metals Commentary for May 15 that “the low level of prices does not mean there is plenty of metal lying around, as evidenced by the firming premiums and an overall scarcity of cathode or scrap, a situation we think will continue for the time being.”

Indeed, as of Thursday, the premium on cathode had risen to plus 8 to 9 cents a pound over spot Comex, up from plus 6 to 7 cents a pound on April 23, according to Platts Premium Assessment for Copper Cathode.

Short-term, the discount on scrap has become a little more favorable.

“So far, we haven’t heard of a huge uptick in demand for scrap resulting from the mine collapse in Utah,” says Joe Pickard, the chief economist and director of commodities at the Institute of Scrap Recycling Industries (ISRI) in Washington, D.C. Bare-bright copper scrap is now being quoted at a discount of 5 to 7 cents versus the three-month Comex contract, compared to less of a discount, in the 3 to 5 cent range, on April 30, right after  about the Bingham Canyon mine collapse, which will result in a loss of about 100,000 tons of refined copper in the U.S. this year.

However, he notes that the discount has narrowed since the start of this year, when it was 8 to 10 cents, offset by the fact that copper prices are down significantly year-to-date. On May 16, 3-month Comex closed at $3.29 a pound, down 11.8% from $3.73 a pound on January 2.

What is “undoubtedly mitigating the fallout from the BC [Bingham Canyon] accident,” Meir said, is that “the Chileans are experiencing a banner start to the year, with March output running some 8% higher than 2012 levels.”

Meir also noted that “on the demand side, Chinese copper scrap imports were higher in March vs. February, but are still below 2012 levels. Also, while [Chinese] refined imports were up, the incremental increase was insignificant (only 4,000 tons), particularly after adjusting for the holiday-shortened month.”

But Goldman Sachs believes that the copper sell-off is “overdone,” and said it remained “bullish” on the outlook for copper prices over the near-term, defined as the next three to six months. For 2013, it is estimating $7,648 a ton or $3.47 a pound, largely because it sees “the Chinese copper market tightening, with implications for the global market.”

Goldman says it believes that “China’s underlying cyclical growth is likely stronger than the headline figures suggest. In particular, year-on-year growth in Chinese power output – commonly used as an unimpeachable indicator of Chinese economic growth – for March was likely distorted by the late Chinese New Year this year.” In March, that growth was only 2%, but Goldman said its data for the first 16 days of April showed a much more vigorous growth rate of about 10% year-over-year.

Goldman also noted the “increasing consensus that the market is headed for surplus in 2014.” Longer-term, it sees a surplus of about 450 kilotons in 2014, and a surplus of about 500 kilotons in 2015, “despite an assumed robust ex-Chinese demand recovery,” it said.

Looking ahead to 2014, Goldman forecasts a much lower average price of $6,925 a ton or $3.14 a pound, and for 2015, an even lower average of $6,875 a ton or $3.12 a pound. But Goldman also believes the surplus will be “transient in nature,” since once prices decline to a certain point, there’s no incentive to start new projects. Therefore, it’s also predicting that prices will rise again in 2016 to an average of $7,500 a ton or $3.40 a pound.

In-between, though, all the signs are pointing to a period of time through 2015 when copper will finally be in surplus after its three-year deficit, and more fairly priced. And if the CBO is right, and the federal deficit continues to shrink through 2015, a stronger dollar should help to keep the copper price down as well.

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