Fret not: copper demand to trump price volatility

By Melanie Burton and Alonso Soto

SANTIAGO (Reuters) – Even if copper prices plunge soon, as industry players gathered here expect with China sitting on the bench, the top copper consumer is seen returning to the market and driving prices to new highs by year end.

China’s absence from the copper market has dampened bullish conviction at the world’s biggest annual copper conference in Chile, with copper prices seen sinking around 20 percent in coming months from life highs of $10,190 tonnes in February, before staging a rebound.

Speculation has been rife as to whether China will return to the spot market this quarter, with many industry insiders expecting purchases to be delayed and pointing to rising warehouse stocks.

“You will get volatility, and I think that is what we are seeing right at this moment in time. But its going to be a short-term volatility period,” said Andrew Harding, CEO of Rio Tinto’s (RIO.L: Quote, Profile, Research) copper unit chief executive.

“But the longer-term story actually says there’s good demand and that supply is actually struggling to keep up,” he added.

Harding believes the world copper supply deficit could hit half a million tonnes this year and that the shortage could extend beyond 2013. His view for the year is wider than the market consensus of around 400,000 tonnes.

Credit Suisse expects Chinese demand to remain robust, citing a divergence between apparent consumption data and underlying demand.

“While the weakness in the physical market is unambiguous, indicators for underlying demand have remained strong,” the bank said in a research report.

“We believe this gap will be closed primarily through a rebound in imports and refined production. Recent draws of non-bonded Shanghai Futures Exchange stocks may be the first sign that this transition is already underway,” it added.

China’s interest rate hikes are fanning fears of a deeper slowdown. The Chinese central bank raised rates on Tuesday for the fourth time since October as it seeks to counter price pressures in the world’s top base metals consumer.

A source at a small Chinese copper merchant, which buys just 2,000 tonnes of refined copper and 300,000 tonnes of concentrate a year, said the company had no plans to buy from the spot market because of rising capital costs and negative arbitrage of Shanghai-LME.

“An interest rate rise is not good news for the copper price,” he said.

Fears of more cut backs in China mixed with strong market fundamentals has left some at the conference feeling deflated.

“Usually I leave this conference feeling bullish copper, but this year it’s different. It’s not bearish, it’s flat,” said a banking source.

But there are some bright spots. Some see signs of a tightening in China’s scrap market, the first stop to source metal before moving to the open market.

“China is out of the market and has been for six months. That’s not sustainable, even with interest rate rises. After working through quite a few cycles, the fact they’re not buying now doesn’t spook me at all,” said a trader at a large Swiss merchant.

(With reporting by Julie Gordon and Ignacio Badal. Writing by Simon Gardner; Editing by Alden Bentley)

Fret not: copper demand to trump price volatility