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Supply Glut Continues to Weigh on Copper


Copper could continue to be the worst performing base metal.

Copper could be set to underperform its base metal counterparts in the medium term, with supply issues expected to continue weighing on prices into 2014 and beyond, say some analysts.

Copper for December delivery ended Wednesday's trading session at $3.24 per pound on the Comex division of the New York Mercantile Exchange, representing a 1.8% drop, and remained flat on Thursday. So far this year, copper has posted a decline of around 13%.

Peter Ghilchik, manager, multi-commodity with CRU International in London, says he expects copper to continue to be the worst performing base metal, in terms of price, over the medium term.

"Low copper price is based on the market turning to persistent supply surpluses. Although we forecast the 2013 market surplus to narrow in 2014, we expect this oversupply to widen again in 2015 and beyond," he explains.

In the last quarter, according to a recent CRU Copper Market Outlook, copper prices have been battered by market shocks related to the US Federal Reserve and its possible tapering of its bond-buying program, and weak Chinese data releases. The metal moved to a near three-year low of $6,676 per ton on June 24 for London Metal Exchange (LME) three-month copper.

"On top of this confirmed downward shift in the price, CRU now sees a wider market surplus in 2013 as a result of reductions to our consumption projections and a larger drawdown of Chinese-bonded stocks in Q2 than previously expected," says CRU. The group has lowered its 2013 price outlook to average $7,361 per ton for LME three-month copper, a slight lift from current prices, which are just over $7,100 per ton.

Indeed, analysts across the board seem to be expecting similar outcomes. Earlier this year, the HSBC Global Equity Metals & Mining team and other commodities analysts lowered their copper price forecasts by 9% for this year and 3% for next, expecting copper prices to average USD $7,250 per ton in 2013.

Similarly, according to the Wall Street Journal, Barclays analysts also recently noted that they are expecting copper prices to fall below $6,000 per ton by the end of 2014.

The bank is expecting a 387,000 ton surplus in the copper market next year -- representing the largest surplus since 2009 -- as a result of stronger mine supply.

This, according to Barclays, could mean that "the potential downside for copper prices is bigger than for any other metal and that prices could start to eat into the top end of the cost curve in 2014."

Copper stocks have also not had an easy year so far, with Freeport McMoRan Copper & Gold (NYSE:FCX) down 8% year-to-date, while Southern Copper Corp. (NYSE:SCCO) shares have shed more than 26% so far in 2013.

The Economist Intelligence Unit said last month that it is forecasting copper prices will move "sideways to higher" in Q3, but expects "a more concerted recovery" in the fourth quarter, with an expected pickup in demand.

"A recovery in global demand will carry this momentum into 2014, although the exodus of investment money from the markets now that the end of the Fed's ultra-low interest rate policy is being priced into the market means that price increases will be modest," says the EIU.

Over the medium term, Ghilchik says his firm's copper team is expecting to see supply growth of 3.8% next year, accelerating to 6% in 2015, with refined copper production climbing as new projects come onstream.

For 2014, according to his group's outlook, reduced momentum caused by the substantial downward shift in prices this year is expected to result in a "subdued period" with prices continuing in the range of $7,000 per ton to $7,300 per ton.

Prices will be restrained, says CRU, by both a slowdown in China and nervousness surrounding proposed LME changes to warehousing regulations.

Twitter: @helenbnichols
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