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Supply issues will drive copper market into deficit by 2011--BMO
BMO's Bart Melek says firm demand and mine production risks mean good news for copper prices in the long term.

Author: Dorothy Kosich
Posted: Friday , 13 Nov 2009

RENO, NV -

BMO Capital Markets Global Strategist Bart Melek forecast Thursday that supply issues will drive the global copper market into deficit by 2011.

"Growing demand and supply issues, ranging from large swaths of the industry negotiating labour contracts over the next year, to declining ore grades and a relatively modest and uncertain project pipeline, are likely to place the copper market into a deficit by 2011," he predicted.

In a copper outlook, Melek and associate Michael Zimmerman forecast that copper will average US $3 per pound next year and $3.30/lb in 2011. Long-term prices are projected to be $2.20/lb, which BMO research believes is the level required to sustain the industry.

However, they warned, "possible slower Chinese imports, rising exchange inventories and recent disappointments on the U.S. economic front represent any downside risks in the short term." Nevertheless, they advised, any correction would be "short lived and modest."

In his analysis, Melek suggests investors ‘attitudes towards copper have changed for the better since earlier this year. "This improved sentiment, barring some limited near-term corrective, should continue to prevail in the marketplace well into 2011 as the China-led global recovery continues to firm materially, the U.S. and Europe emerge from recession and restocking commences outside of China."

Despite what Melek and Zimmerman called a "dismal" first half of this year where copper consumption in the western world was at its lowest since 1983, Chinese copper consumption should jump as much as 20% this year.

Meanwhile, as the U.S. continues to ramp up on its stimulus money spending, the analysts suggested the U.S. will actually help lift copper consumption. BMO forecasts refined copper consumption in advanced economies will grow about 1.4% in 2010 and increase 1.9% in 2011. "However, longer term, growth is likely to be somewhat muted due to the depth of the downturn and the still lingering problems in the western world's financial system."

Melek and Zimmerman cautioned, "The combination of a series of announcements of lower-than-expected production and labour issues could see output disruptions due to ‘unforeseen' events at a minimum of 700-900kt in 2010, and possibly much higher."

Strikes at BHP's Spence Mine in Chile, Vale's Sudbury and Voisey's Bay operations in Canada, the potential for strikes at Codelco's Andina and Codelco Norte divisions, and potential work stoppages in Peru could have a significant impact on copper mine production this year, they suggested.

Meanwhile, mine output has also lagged expectations due to technical issues, such as the damage to the haulage shaft and BHP's Olympic Dam in Australia. Palabora Mining reported a 15% decline in mined output during the third quarter, while Xstrata reported a 9.6% production decline.

"Due to these factors, BMO Research has therefore cut its 2010 production estimates by some 200kt. This should help unwind the inventories that accumulated over the last several years, tightening the copper market and lifting prices to historically high levels in 2010/11."

Nevertheless, BMO expects firm growth through 2014. "The longer-term copper price outlook is upbeat as the BMO thesis that the fundamental commodities story is bullish remains intact. The need for massive infrastructure spending in association with industrialization and urbanization in the developing world is not expected to diminish."