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Copper Set for a Bounce

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Turnaround in China plus supply disruptions may push stocks down to "critically low levels," says one analyst.

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Although copper hit a three-month low last week, the price of the red metal may be set to move higher heading into the second half of the year and looking ahead to 2013, say commentators.

Copper for April delivery ended last week at just over $3.62 per pound on the Comex division of the New York Mercantile Exchange, representing its lowest level since January. On Wednesday, copper was trading at a similar level, representing a gain of just over 5% year-to-date.

Peter Ghilchik, multi-commodity manager with CRU in London, which is hosting the World Copper Conference this week in Chile as part of CESCO week, says that weaker demand from China in the first half of this year has certainly been slightly reflected in copper prices.

However, he says CRU expects that sluggish growth in the first half of 2012 will be reversed in the second half with China expected to have a slight bounce back as monetary-policy loosening leads to higher output of copper-containing end-use products.

"If we start to see China coming back more strongly in the second half, which is something that we expect, then we could see, you know, stocks starting to come down to really critically low levels and we could see prices sort of bouncing up," says Ghilchik, toward $10,000 per metric tonne by the second quarter of 2013.

In the meantime, CRU forecasts that increases to consumption forecasts for the US, Brazil, and the Middle East, and a less negative outlook for Europe, will compensate somewhat for slower Chinese growth. "A stuttering return of investor money" also means quarterly average prices are forecast to rise to a peak of $8,650/t in Q4 and average around $8,480/t or $3.85/lb for the year, says the group.

According to Reuters, the Thomson Reuters GFMS Copper Survey 2012 released this week calls for copper prices to remain in a range of $8,300 to $8,800 per tonne in 2012, as "the dominant supportive factor in recent years -- limited supply, particularly at the concentrate stage, nevertheless remains in place," says the report.

The Economist Intelligence Unit also noted at the end of March that although the demand outlook for the metal has been dampened by slowing economic growth, it continues to see a tight copper market going forward.

The EIU expects supply to fall short of overall demand by 67,000 tonnes in 2012 and by 199,000 tonnes in 2013, with stocks accounting for just less than two weeks' consumption at the end of 2012, and 1.3 weeks at the end of next year.

"The outlook is therefore pointing to copper becoming a critically tight market, which provides a bullish fundamental backdrop that should underpin a further recovery in prices in 2012, driven by strategic physical buyers and investors," says the EIU.

The organization also expects refined copper prices to rise in the second quarter, to $4.00 a pound, up from $3.80 in the first quarter.

Meanwhile, forecasts for metals prices are being revised across the board. Earlier this month, Bank of America Merrill Lynch upped its 2012 forecast for copper by nearly 7% to $8,275 per metric ton, from its previous forecast of an average of $7,750/ton, according to MarketWatch.

The Wall Street Journal also reports that while Citi Investment Research raised its average copper price forecast to $3.85 per pound in 2012, from its previous forecast of $3.55 per pound, it expects average copper prices of $3.80 instead of $3.87 in 2013, and $3.61 in 2014.

On the supply side, the world's largest publicly traded copper company, Freeport-McMoRan Copper & Gold (FCX) reduced its Q1 production and sales estimate by 80 million pounds of copper, as a result of production disruptions at its Grasberg Mine.

Earlier this week, Rio Tinto (RIO) announced that mined copper production in the first quarter was 18% lower than the first quarter of 2011 as a result of anticipated lower grades at Kennecott Utah Copper.

In the medium term, although a number of new projects and supply are expected to come onstream in 2013, 2014, and 2015 that will have a short-term impact on prices, Ghilchik doesn't see it as being enough to drastically change the market.

"As soon as you start to move out of that sort of medium term forecast, past 2016, then we start to forecast again the market returning back into deficit, as you know, as demand growth starts to increase above supply again," he says.
No positions in stocks mentioned.
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