Copper to cross $11,000

If one is asked to take a bet on which commodity in the metal space will shine most gloriously in New Year, they unhesitatingly will choose copper. Generally, ahead of year-end holidays, the market doesn’t see much activity as traders are mostly engaged in book squaring work. But taking a break from the routine, the red metal three-month futures prices this time moved from one peak to the next before the holiday break.

The fundamentals are stacked so much in favour of copper that many are seeing the metal sprinting to $11,000 a tonne and perhaps beyond during 2011. As if the world supply in normal course falling short of demand is not enough, owners of the world’s third largest copper mine Collahuasi in Chile invoked the force majeure clause the other day to suspend supplies of copper concentrate for an unspecified period. This is further feeding fuel to progress of metal price.

Shipments from Collahuasi came to a halt in the wake of three workers perishing under the weight of a collapsed shiploader at Patache port terminal. It could be at least another fortnight before copper concentrate could get shipped from Patache. The market cannot but react to shipment disruptions from Collahuasi which in 2009 had a 3.3 per cent share of the world’s mined copper.

These disruptions are, however, a short-term phenomenon. But well before the accident took place, research houses and banks were unanimous in saying that supply shortages will help the red metal in outshining other base metals. We have got forecasts of copper supply shortfall in 2011 ranging from 380,000 tonnes to as much as 500,000 tonnes. Going beyond 2011, Standard Bank says the deficit will rise to 562,000 tonnes in 2012. Industry representative body International Copper Study Group is anticipating a shortage of 435,000 tonnes this year.

The increasing tightness in copper supply has got much to do with not so encouraging investments in the past to identify, prospect and open new mines as minerals and metals groups worldwide were handicapped by the low prices that the red stuff got for a long time in past. This also created a situation for the miners to go on randomly removing the better quality ore from mines. No surprise, therefore, that the world average copper content in ore is steadily falling.

India figures prominently among emerging nations as a consumer of copper in 2011. After all this country recorded a smart 13 per cent rise in copper use during 2009-10 and the trend should continue, if not gather in further momentum as we grow GDP at the current rate with sufficient focus on infrastructure development. But the local copper industry here has a structural weakness in that only a small portion of concentrate from which cathodes are made is locally generated.

Chairman of Hindustan Copper Shakeel Ahmed sees an opportunity in this, HCL having lease rights over 280 million tonnes of the country’s ore reserves of 370 million tonnes. He is to recommission HCL closed mines, step up production at operational mines and also open new ones. HCL could not have chosen a better time to target a mineral production of about 12.5 million tonnes by 2015-16 from 3.2 million tonnes last year. World copper prices are ruling at a level to make our low metal content in ore less of a development deterrent. Moreover, our ore, in spite of all its deficiencies has today an edge over the world average in terms of metal richness.

The worsening deficit situation besides, what is squeezing copper market to its tightest is the improving demand outlook for the metal in the US, where the economy, according to former Fed chairman Alan Greenspan, is picking up speed to likely record growth of 3-3.5 per cent in 2011. The US incidentally is world’s second-largest market for copper after China. As November data will confirm for straight five months, the US consumer and business expenditure is rising.

Interestingly, Moody’s downgrading Ireland’s rating by 5 notches and on top of that IMF offering a discouraging view of the country’s debt problem has not proved bad enough news for copper bulls. Similarly, the lingering concerns about China raising interest rates – these came for revision for second time in over two months – have left no impact on the copper market. If anything, traders are drawing inspiration from China’s copper imports amounting to 3.95 million tonnes in the first 11 months of 2010 when its production was a high 4.37 million tonnes.

Amidst all this, the artificiality of the physical market where one trading house has cornered most of LME stocks is contributing to market tightness. The outlook for the metal being so good, it is only to be expected that a few investment vehicles backed by physical copper will get launched. Once these vehicles get regulatory clearances, a long process by any measure, they will be securing for themselves large quantities of physical copper sending the premiums higher. We have big names like JP Morgan, BlackRock and ETF Securities lining up to lauch copper exchange traded funds.