Copper price forecasting difficult

The cash price of cash copper on the London Metal Exchange (LME) went from US$1.34 on Sept. 3, 1990, to US$1.53 Sept. 17, to US$1.26 on Oct. 1, and finally to US$1.07 on Jan. 30, 1991. Furthermore, LME stocks went from 132,500 tonnes on Sept. 3, 1990, to 186,925 tonnes on Oct. 1, to 188,525 tonnes on Jan. 30, 1991. Whoever squeezed the market in September had to eat a lot of copper and it is possible that no one has taken it off his hands yet. Furthermore the price is a good bit lower. It ain’t over ’til it’s over, but my guess would be that, at least for the moment, someone is hurting.

Apart from price levels, the market internals have slowed down. Internal price relationships are in fact quite attenuated as compared with recent history over the last year or so. The Comex/LME arbitrage has settled into a narrow range between 1.5 to 2.5 whereas it had, in the last six or eight months, been as wide as 5.5 and as narrow as level with wild swings in nearby and cash parities occasionally reaching levels of twice that amount.

Spreads have also reflected a calmer market. The LME, with some brief exceptions, has settled into a contango (where future prices are higher than current prices) configuration with pieces of it at full finance. At this writing there is still a residual backwardation (where current prices are higher than future prices) on Comex, but it is looking more and more shaky.

The market for copper concentrates has eased significantly in the last year. Ultimately, and I stress this word, copper concentrates call the tune with regard to price of refined. If concentrates are in oversupply, prices of refined metal on terminal markets can’t stay up forever, although the lag in this effect can be months.

The Peruvians haven’t been heard from much lately; nor have the Zambians and Zairois. More serious is the ongoing loss of production at Codelco’s El Teniente. The first labor negotiations in Chile under the new civilian regime will be coming up soon and disruptions should be expected.

All of these things are at least potentially worrisome to the supply side of copper. They are difficult to factor in because they are in large part random.

Finally, there seems to be peace at Bougainville in Papua New Guinea. No doubt, re-start of production is months, if not a year, away. I don’t know how long it will take to get it up and running but of one thing I am certain: if history is any precedent, it will come on stream when it is needed; that is, when oversupply has hit.

But there is no doubt that Escondida in Chile has come on stream ahead of schedule and full blast. At 320,000 tons per year copper contained, by itself it is sufficient to have caused the weakening in treatment terms. Where there is smoke, there’s fire; where there is copper concentrate, there is metal (although it may take a few months).

Japan and the rest of the Far East are holding up. Japanese buying for January, 1991, shipment was substantial. It may be slowing down now but it is too early to tell. Lower GNP growth is expected in 1991 but still in the order of 3% per annum, which by current U.S. standards is still hefty. Public works programs, etc., should keep the pot boiling in Japan.

The narrowing of the arbitrage, if it holds, will probably slow the U.S. down as a supplier of refined metal to Japan. The Japanese market will, however, be much more affected by the fact that Japanese smelters have bought 50% of Escondida’s concentrate shipments. Since this has filled empty smelting capacity to some degree, it will create an addition to refined metal supplies in Japan and will significantly reduce the need for Japan to import copper metal.

While Japan is in good balance, the tendency in Europe, with the exception of Germany, to continue to slip further into recession is firmly in place. In the U.S. the story is well known. Housing starts continue to show very little life; auto sales fell off a cliff when the war started; and commercial construction is dead in the water in most parts of the country.

We must note that seasonal buying can be expected in the next few weeks but, with demand weak, it probably won’t lead to a sustained rally on its own. If production continues to build, fund activity may tire of the copper market and go on to the next game.

At the Metals Week Copper Conference in Orlando, Fla. in January, the consensus seemed to be mildly bearish among those brave souls who ventured an opinion. Most seemed to think that copper was likely to go under a dollar for the balance of 1991, but not by much.

With production costs having been reduced in North America to well under US60 per lb. for the most part and in the range currently of US47 in Chile, an argument could be made for a price well under US90 by the end of 1991.

Since we are clearly at the end of the usual copper price cycle, this argument would normally be compelling except for the Gulf War.

On the positive side, lower interest rates and a lower price of oil (if it holds and there is no guarantee that it will) will provide some help to the U.S. economy, to buy only somewhat down the line. The effect of the war is still the wild card.

We should also note that with all of this negative news on the economy, there has as yet been no real buildup on Comex (Commodity Exchange of New York) warehouse stocks. LME stocks built rapidly to just under 200,000 tons in the fall but there has not been much net addition since. U.S. producers continue to be seen from time to time in the marketplace as spot buyers. Robert Green’s Market Letter appeared in a recent edition of Copper Talk, an American Copper Council publication. Green is president of Connecticut Minerals and Metals.