The longer term outlook for copper is weaker as new mine projects in the works are expected to bring an oversupply of the red metal by 2014 (see “Copper rush,” below). Paul Dewison, United Kingdom-based director of base metals for Intierra Resource Intelligence, says new production will add about 800,000 metric tons of new supply to the approximately 20-million-ton market this year and will continue to ratchet higher in the next few years until more than 2 million tons are scheduled to be added in 2015.
“But that’s very, very unlikely to happen,” he adds. “By that time, we probably will have had several years of market surplus. One way or another we’re likely to see projects slipping and projects falling off the current list.” But Intierra still expects the surplus to cut prices for copper to about $6,000 per ton by 2015 from about $8,000 a ton this year.
“The demand side this year is not brilliant,” Dewison says. “We’re likely to see it picking up to 3%-plus for the year. But production is likely to be growing that much quicker. We see it this year as being one of a very small surplus with a slightly larger surplus the following year. This year we’ll say it will be on the order of 50,000 tons and maybe 150,000 next year, and by 2014 maybe 250,000.”
Aluminum demand is not as vibrant as copper and is a bit more sluggish, Meir says. “If you look at the charts, that’s because we have so much inventory in stockpile and the inventory is not really available. It’s just another kind of financing play where people store metal and they sell forward aluminum like one year out or 15 months out and they lock in a certain contango, which nets out to about 1%-2% after all costs. So it’s like a risk-free trade. In the meantime inventories keep piling up.”
In contrast to the copper inventories accumulating in China, most of the aluminum stockpiles are building up in Detroit with other inventories held in the Netherlands, Meir notes. “You have the odd situation where the warehouses are owned by some of the big banks — JP Morgan owns a warehouse, Goldman owns a warehouse — and they are using very cheap money to buy aluminum, put it in storage, sell the forwards and lock in a nice rate of return.”
Patricia Mohr, vice president of economics and commodity specialist for Scotiabank in Toronto, notes that China recently has been developing a new aluminum industry in its western and northern provinces based on steam coal used for low-cost electricity. That also has been holding down world aluminum prices. “Last year prices for aluminum on the LME were roughly at cash cost for smelters around the world,” she says. “But the prices have lifted this year and are at modestly profitable levels.”