Copper price shows strength despite Gulf War, slow growth

Copper prices have shown “remarkable resilience” since the beginning of 1991, despite the Persian Gulf War and faltering global economic growth, said London-based investment firm Carr Kitcat & Aitken in a recent report.

By about mid-summer, the price had averaged US$1.08 per lb., down from the US$1.18 recorded in the fourth quarter of 1990. “This resilience has largely been derived from a finely balanced supply-demand situation, coupled with the ability of influential market operators to maintain a squeeze on LME (London Metal Exchange) supplies and thus keep prices artificially high,” said the firm.

“Deteriorating market fundamentals suggest that current levels are not sustainable, however, and although prices have already fallen sharply, a further decline is likely by year-end.”

In the short-term, said Carr, caution about the expiration of labor contracts in Chile and Canada should ensure that prices remain firm, with bouts of short-covering likely to cushion any declines.

“Throughout the remainder of 1991,” Carr said, “copper supplies are forecast to grow strongly with substantial quantities of refined metal from the new Escondida mine in Chile reaching the market. When coupled with increased exports from Eastern Europe, we expect the market to record a significant (150,000 tonnes) surplus for the first time since 1987.

“Although supply disruptions and delays are likely to continue, their impact on a copper market progressively moving towards oversupply is expected to be limited and we expect prices to remain in their current bear-trend.” A 13-day strike earlier this year at Chuquicamata, the world’s largest copper mine, brought little reaction from the market.

“Had the strike occurred in any of the past 3-4 years of tight markets, the effect on prices on the upside would likely have been considerable. This year, however, the lack of supply tightness resulted in only a brief, and rather limited (3-5 cents), upward move, despite Codelco moving to cover their commitments through the options market (equivalent to about 30,000 tonnes of metal),” said Carr.

“A continued slowdown in world economic growth is likely to undermine copper consumption in 1991 and we expect that Western world demand will grow by only 0.5% (versus 1.5% in 1990).

“Copper demand in the U.S. is forecast to decline 1.8% this year, with the important copper consuming sectors (autos, construction and capital goods) likely to remain weak, as the economic recovery is expected to be relatively modest due to the high levels of debt in the economy.”

Demand in Europe is off considerably and the growth rate of copper consumption in Japan has fallen.

“The expected shift in the physical market towards oversupply, as a result of weakening consumption and strong production growth, is likely to see refined inventories steadily increase over the rest of 1991. Consequently, prices are likely to weaken over the coming months, moving towards a range of US85-90 cents by the end of the year,” said Carr.

“The outlook for 1992 appears more positive, however, with an improving U.S. economy, coupled with a resumption of strong economic growth in Europe and Japan, likely to result in copper demand rising by 2.4%.”

For 1991, Carr expects average copper price of US$1, compared with US$1.21 last year, and an average price of US$1.05 in 1992.