Heavy metals

September 30, 2010 07:00 PM

Copper prices bottomed in June because of a de-stocking cycle in China when inventories were cut. “The path of least resistance is for these copper prices to move higher because the de-stocking has already priced in weakness in China,” David Abramson, managing editor of the commodity and energy service at BCA Research, says. “China has accounted for more than 100% of the change in copper demand in the last eight years.”

Catherine Virga, director of research at CPM Group, says that prices for copper could actually go lower. “We’ve seen concern about whether demand will hold up over the second half of the year given economic forecasts. We’re going to see a return in Chinese buying,” she says, adding that we could see a bigger correction in terms of demand. “The consensus in the market is that copper is going to be in balance this year. Prices could fall as low as $5,800” per ton, or $2.90 per pound, by year end.

Abramson disagrees about the supply picture. “[This could] be the year with copper where you get the supply everyone expects instead of disappoint[ing] to the downside. As long as it keeps disappointing to the downside, there’s going to be difficulty for copper prices to fall even if you [are] worried about Chinese growth on the supply side,” he says. He expects copper to remain flat or move moderately higher for the rest of 2010, to $7,000-9,000 per ton, or $3.50 to $4.50 per pound.

Rich Ilczyszyn, senior market strategist at Lind Waldock, expects copper to go to $3.75 per pound, or $7,500 per ton by year end. “Out of the manufacturing sector, copper will be the first metal to start going up and re-testing this year’s highs. There’s a lot of speculation in that market [and] new investors [are] looking for something that will give them a return this year because the equity market isn’t doing it,” he adds.


Zinc also is being affected by the economy and the Chinese business cycle. “The reason zinc inventories are at a 15-year high is because the supply has come on stream pretty steadily. Zinc and copper are going to move together, but zinc is going to underperform [because of] supply,” Abramson says. He expects zinc to be at $1,600-$1,900 per ton, or 80-95¢ per pound, by year end.

“There’s some underlying support for prices with some restocking by steel fabricators and supply disruptions but there’s still a pretty big surplus in the [zinc] market in comparison to copper. The market isn’t expected to move into deficit conditions until 2012,” Virga says. She expects the average price in the fourth quarter for zinc to be $1,900 a ton, or 95¢ per pound.

Like energy prices, what happens with the economy will be key. “The key distinction you have to make is, ‘can China decouple from the rest of the world?’ And metal consumption has been so weak for the past three to four years in the industrialized world. If the world economy is ok and muddles along and China goes into a soft landing, it’s good for metal prices,” Abramson says.

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