Copper’s down but due to rise

Copper producers are still struggling through a protracted period of low prices, the lowest since mid-1984. As the traditionally quiet summer comes to a close, many are looking for better things ahead.

Mining analyst John Lydall at First Marathon Securities is one who thinks the recent weakness in copper prices won’t continue. He cites low inventories and a relationship between copper and precious metals established in the 1976-80 cycle as two main reasons.

“Copper at current prices looks absurdly cheap,” says Mr Lydall.

Furthermore, he suggests that if prices stay at this “absurdly” low level, production cutbacks are bound to occur which, once in place, could stimulate price increases at a time of year when demand, too, normally increases.

In copper, as in aluminum, consumers made large purchases early in the year in anticipation of labor problems among U.S. producers. This was going to be a bad year for such disruptions, the theory was, with producers still on the ropes and unions anxious to make up shortfalls from earlier years.

As U.S. labor contracts expired, those disruptons never occurred. The result was that production never faltered but demand slumped during the summer. Prices, needless to say, drifted lower.

Alan Davidson, a London-based analyst with Shearson Lehman, holds a similar view, but he also refers to “an improving chart pattern” for his confidence that copper prices will increases in late ’86.

Mr Davidson’s not getting carried away, however: “A further rally towards resistance at 65 cents U.S. per pound, basis December, is still feasible.”

While U.S. labor disruptions didn’t materialize, a potentially major labor problem did rear its head in Canada. Workers at Noranda’s Horne smelter in Rouyn, Que., are still on the job, but the union has a mandate to strike and its contract has expired.

“Canadian producers are finally being forced to bite the bullet as the Americans and Australians have done,” says Mr Davidson.

Electa Aust at Wood Gundy is bearish on base metals for the long term but suggests there is statistical evidence to indicate a strengthening following the summer months that could continue to the early months of the following year.

“Statistically and assuming no recession in the U.S. in 1987, the chances are that the spring will bring a rise in the price of base- metal shares,” says Ms Aust.

Laying the groundwork for such a strengthening among copper producers is an improving fundamental picture.

“Copper fundamentals are far better than they have been in recent years and it is perhaps astonishing that consumers in, say, Germany and Japan are not building inventory at current prices,” says Mr Lydall. What makes that even more surprising is the relative strength of those two countries’ currencies putting copper prices at bargain basement prices.

Total western world copper inventories during the first six months of 1986 declined by 172,600 tons to 600,000 tons according to the U.S. bureau of metal statistics. As recently as the end of 1983 stocks were as high as 1.3 million tons says Mr Lydall.

“Inventories are now finally down to what have always been regarded as `normal working’ levels. Any further inventory drawdowns will cause purchasers increasing concern about availability of material,” he says.

“We are becoming increasingly convinced that a substantial rise in prices will occur over the next 12 months.”