Why Copper is the most bullish commodity(ZT)

2007-12-08 09:00:00
	Why Copper is the most bullish commodity By Jane Louis St. LOUIS (ResourceInvestor.com) -- The analysts at Goldman Sachs JBWere don’t seem too concerned about the U.S. housing slump’s impact on the copper price. No matter that their colleagues have downgraded economic growth forecasts for the United States due to significant drops in housing starts and home prices. Generally, weakness in the housing sector equals a drop in copper demand - which logically leads to a drop in the copper price. And while that is still true, analysts Malcolm Southwood and Paul Gray said in their “Industry Insight Commodities” report last week, the more important factors are the offsets that the copper market will see from a significant increase in demand from China in the next year. Chinese consumption, they said, along with increased demand in other emerging countries, will support the copper price in 2008. That is why Southwood and Gray are holding Goldman Sachs’ 2008 price forecast at $3.65 per pound - despite the pathetic outlook for the U.S. housing market. “Basically, the view comes down to continuing strong demand growth in China and other emerging markets, and the fact that the supply side is struggling to meet production targets from existing mines, let alone deliver significant new capacity in a timely manner,” Southwood told Resource Investor in e-mailed comments. Rising Copper Demand in Emerging Economies The analysts raised their Chinese copper demand growth to 19% from 18% in 2007 and to 15% from 12.5% in 2008. “We believe that this is consistent with the very large additions to China’s semi-fabricating capacity that are currently under way and with the continuing boom in construction and infrastructure,” the Goldman Sachs analysts said in their report, estimating that Chinese offtake will rise by 622,000 tonnes in 2008. They made comparable increases to their demand growth expectations for other emerging economies, including India, Eastern Europe and the CIS. Positive demand growth in these countries will counterbalance Goldman’s lowered demand growth forecast for the United States, according to the report. The analysts, who said that they are in no way trying to downplay to impact of the United States’ housing slump, dropped their outlook for 2008 demand growth in the U.S. to -3.5% from -1.2%, reducing the forecast for copper consumption in the country by 57,000 tonnes. “In 2007, data for the first nine months of the year, combined with the Goldman Sachs estimate for the December quarter point to a 23% fall in total housing starts which, allowing for the split between single-family and multi-family units, implies a ‘loss’ of about 80,000 tonnes of net copper end-use this year due to weakness in residential construction alone,” the report said. “We believe that this loss was partly offset by strength in non-residential construction, particularly during the first half of the year. We estimate that the net loss to end-use consumption as a result of construction sector weakness in the USA for 2007 will be in the order of 60,000-70,000 tonnes. Not all of this will present as lower refined copper consumption in the USA because a significant portion of copper semis used in the construction sector is imported; rather the bottom line is a loss of 60,000-70,000 tonnes of final net copper consumption, but shared between the USA and its trading partners.” The analysts said in 2008, reduced copper consumption will have a similar impact on the U.S. and the countries that export semi-manufactured copper to it. “Looking out to 2008, our Goldman Sachs colleagues are forecasting a further 35% drop in total housing starts. Using a similar method of estimating the impact on copper demand to that outlined above, this implies a loss of c.95,000 tonnes of final net copper consumption in 2008 through weak residential construction activity in the USA.” Southwood and Gray said in the report that the net impact of these demand growth adjustments has been to reduce their global copper offtake forecast by 177,000 tonnes in 2008. They now expect global copper demand to grow by 4.9% next year to 19.099 million tonnes. “The bottom line is that we continue to model a very tight global copper market in 2008, in which balance must again be achieved partly through demand destruction.” The Goldman Sachs analysts aren’t the only bulls in the copper market. “I am bullish on copper as well,” Matthew Sena, an analyst at Castlestone Management, told RI. “Though I think the U.S. housing slump is pushing down prices now, I believe we will still avoid recession. Non-residential construction is meaningfully up year-over-year, and China’s build-out in preparation for the Olympics (and in general) should keep demand strong. Inventories, while building, are still low historically and copper’s supply is still tight enough to be susceptible to shocks. “It’s a bit of a fool’s game to try and time it, but I could envision copper working its way back to the $3.50-$3.70 range later in 2008.” In addition, Chile’s state copper commission, Cochilco, said last month that it expects average prices of about $3.10 per pound in 2008 - topping an earlier estimate of $2.70. “Dynamic demand from China, higher than expected, together with difficulties in the industry to achieve production plans, generated a deficit situation in 2007 and project a balanced market in 2008,” Cochilco Executive Vice President Eduardo Titelman said in a media report on 6 November. Chile is the world’s top producer of copper. Barclays Capital commodity research director Kevin Norrish said yesterday that he too is bullish on the metal, calling for an average of $7,800 a tonne on the London Metal Exchange next year. He also said he thinks copper will touch a record high above $8,800 in 2008. LME copper futures have averaged $7,131 per tonne this year. Increasing Global Supply Deficit In October, the International Copper Study Group released a report saying it expected 2007 to have a copper production surplus of approximately 110,000 tonnes and 2008 to have a surplus of approximately 250,000 tonnes. It further predicted global copper mine production in 2007 would rise by 5.1% over 2006 to 15.79 million tonnes. In 2008, mine production is expected to rise by 7.6% to 17 million tonnes. Refined copper production is forecast to hit 18.12 million tonnes in 2007 and 18.95 million tonnes in 2008. In 2009, “the expected growth in production is expected (to) surpass the growth in usage and a larger market surplus is anticipated,” the report said. The Goldman Sachs analysts, however, lowered their global refined copper production to 17.988 million tonnes in 2007 from an original prediction of 18.137 million tonnes. Their forecast for 2008 stayed the same at 19.113. “The supply side of the copper industry, globally, is still struggling to meet production targets at existing mines and to achieve the timely delivery of new capacity,” the Goldman report said. Copper production has experienced several setbacks this year, including multiple strikes and an earthquake in Chile. In addition, there is speculation that Jiangxi Copper Ltd. [SHA:600362], China’s larger producer of the metal, may have to cut output by up to 30,000 tonnes this month during repairs, according to a report. All in all, the next year is shaping up to be a bullish time for copper, according to the analysts. Southwood and Gray said in their report that any current weakness in the copper price is sentiment-driven. “Copper remains our preferred base metal, and we look to use any further price weakness over the year-end period to increase equity exposure,” they concluded. Copper futures added 8.6 cents to close at $3.0945 a pound today on the New York Mercantile Exchange, a 2.5% gain.