ANNUAL METALS REVIEW Copper RED METAL EXEMPLIFIES TREND

This is an interesting idea, which fits well with our own view of commodity prices. We have illustrated this view (which is based, in part, on the work of Allen (1960) and of Robinson and Keefe (1980), in Figure 1. Point C on this chart marks the critical level of inventories, which Dr Curlook would call the “pinch-point.” When inventories drop below this level, consumers become worried about security of supply, and the dynamics of the market change. Seasonal Adjustments

Seasonal adjustment is a procedure, used by government statistical bureaus (such as Statistics Canada and the U.S. Dept. of Commerce), which attempts to remove the seasonal variations in any time series, thereby revealing the real, underlying trend. It is important for those who follow markets on a daily, weekly, monthly or quarterly basis to use seasonally adjusted figures for supply and demand. Unadjusted numbers are distorted because of certain effects, such as summer slowdowns, and the fact that different months have different lengths. Seasonal Influences Obscure Long-Term Trend

Figures 2 and 3 demonstrate seasonal variations and adjustments. Although the situation illustrated in these figures is entirely unrelated to the rest of this article, it does have instructive value. The solid line in Figure 2 depicts CO2 concentrations in the air at the summit of Mauna Loa, Hawaii, in mid-1972. At first glance, one would say that the trend was downward. However, Figure 3 shows that the decline shown in Figure 2 is purely a seasonal effect (CO2 concentrations are highest at the end of each northern winter, and decline as consumption of fossil fuels declines during the northern summer (New Scientist, 1986). Hence, after seasonal adjustment, the trend of the data in Figure 2 is up.

To illustrate the importance of seasonal adjustment in consideration of commodities markets, look at Table 1. Note that copper inventories are seasonally highest at the end of January. Therefore, to correct January’s figure for seasonal factors, it must be reduced by 3.9%. Furthermore, inventories tend to be below their long- term trends at the end of June. In fact, to correct June’s figure, it must be increased by 3%. These are big adjustments. Clearly, seasonal influences are large enough to obscure underlying, longer-term trends. Accordingly, in the remainder of this article, the monthly supply, demand and inventory figures we present have been seasonally adjusted by us. A “Pinch-Point” Curve in Real Life

Using the method outlined in Table 2, we have calculated copper inventories during the period September, 1984, to December, 1988 (which marked the most recent bull market in copper). During that period, copper prices and inventories behaved as shown in Figure 4. The similarity of Figure 4 to Figure 1 might appear to constitute a ringing endorsement of our theory of “pi nch-point curves.” But wait] So far this year, copper prices have refused to follow the old curve (Figure 5). In an attempt to find out what is happening, we have taken a preliminary look at copper prices and inventories back to the late 1960s. Our survey suggests that pinch- point curves tend to be stable for several years but that, at major peaks or troughs in copper prices, pinch-point curves may “jump.” We consider, therefore, the most likely explanation of the pattern shown in Figure 5 is that, following the price peak at the end of 1988, we experienced just such a “jump” in the pinch-point curve. (However, we are unable to explain why such jumps seem to occur]) Outlook For Copper

Recent trends in copper supply and demand, calculated as outlined in Table 2, are illustrated in Figure 6. On the demand side, consumption of copper grew at 2.1% per annum during the early years of the current global economic expansion (1983 to mid- 1986), then at 2.9% per annum during the Pacific Rim boom of mid-1986 to late 1988. Then consumption briefly shrank at 22.5% per annum as the Pacific economies turned down between late 1988 and mid-1989. This downturn appears to be over. Although we expect to see a slowdown in North America, with renewed growth in the Pacific, we expect that global copper consumption will grow by 2% to 2.5% over the next 12 months.

On the supply side, there will be an increase in mine capacity of about 5.5% between mid-1989 and mid-1990. To this must be added any increase in capacity utilization. Probably the best that the world could do next year would be to return to the record high level of capacity utilization: 88%, which was attained in 1976. (For comparison, in June 1989, before most of the recent spate of production difficulties, the world’s refineries produced copper at a rate equivalent to 84% of global mine capacity.) The total potential increase in supply, therefore, is (5.5 + 4)% = 9.5%. By the way, these measures of capacity utilization are based on the figures of Metals and Minerals Research Services (M.M.R.S.), London. Some observers would argue that M.M.R.S.’s figures include a significant amount of capacity which is really permanently shut down. Indeed, if one were to use the Wharton definition of capacity utilization (Cremeans, 1978), capacity utilization in June would have been around 95%. Inco’s Dr Curlook, suggests that the current, very high level of capacity utilization may be the reason for the jump in the “pinch- point” curve described earlier. $1.05 Forecast

These projections of supply and demand suggest that copper inventories, which at last report (the end of June), were at three weeks’ consumption, will be about four weeks by the fall of 1990. Our old “pinch-point curve” (Figure 4) would suggest that a price appropriate to this level of inventories would be about 60 cents to 65 cents (US) per lb. In the more likely event, however, that the copper pinch-point curve has jumped, we find ourselves in unknown territory. Based on a rough extrapolation, the new curve seems to suggest that, with four weeks’ inventories, an appropriate price is around $1.05.

Our forecast is, therefore, that over the next year, spot London Metal Exchange prices for grade A copper will decline to around $1.05 per lb. Raymond Goldie and Rob Maiman are metals analysts with Richardson Greenshields of Canada. REFERENCES Allen, R. G. (1960) Mathematical Economics, Macmillan & Co., 812 pp, pp 15-19. Cremeans, J. E. (1978) “Capacity utilization rates — what do they really mean?” Business Economics, May, 1978, pp 41-46. New Scientist (1986) “Carbon dioxide concentrations measured in the air above Mauna Loa, the highest peak in the Hawaiian Islands,” May 15, 1986, p 33. Robert, I. C. and Keefe, D. G. (1980) “Commodity Analysis: its application in the context of the South African mining house”, Journal of the South African Institute of Mining and Metallurgy, March, 1980, p 117.

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