RAW MATERIAL PRICE TRENDS

Recent Copper Price Trend

The average quarterly copper price was on a rising trend through 2010 and peaked in Q1 2011 at a 3 month average price of US$9640/tonne. The average price stayed above US$9,000/tonne for the next two quarters before falling back at the end of the year due to worries about the stability of the Eurozone and a general worsening of the global economic outlook. This left the average for 2011 at US$8,825/tonne. After a brief rally in Q1 2012 the average quarterly price then fell in both Q2 and Q3, with the Q3 average being the lowest since Q3 2010. After dipping below US$8,000/tonne in late October the price has edged back above this level at the beginning of December and as we write this article it looks as if the average for Q4 2012 will be marginally above the Q3 number. This will leave the average for 2012 as a whole at between US$7,900 and US$8,000/tonne which will be close to 10% lower than in 2011.

 

No Clear Direction at Present

The copper price movement was very flat in November compared to most other months this year.  Investors point out that copper’s fundamentals are not providing much in the way of direction, leaving the price to be tossed around on macroeconomic data releases and geopolitical events.  Two major political leadership selections this year took place in November, with the result that the incumbent US President Barack Obama was re-elected and the new leaders of China were anointed smoothly.  Neither event caused much of a stir for copper, but sentiments on the US market have now turned to the matter of the upcoming “fiscal cliff”, causing some downward pressure on the price during the month.

At the end of the month data releases revealed more encouraging signals from China and the US, and mixed data from Europe.  With investors tending to respond more strongly to the good news this provided a modest boost to the price in early December. With negotiations for 2013 annual contracts ongoing between most major producers and consumers of cathode, the spot market is quiet as players are reluctant to “move the market”. In this environment, spot premium levels lack clarity but are believed to be in similar ranges to a month ago.

Copper Market in Balance in 2012

Our initial estimates for 2012 point to the refined copper market being roughly in balance with production exceeding consumption by less than 200,000 tonnes or under 1% of the market. Once you add in our estimate for the rise in stocks at the SRB in China plus growth in stocks in bonded warehouses in Shanghai then this leaves the world market for 2012 with a small (13,000 tonne) deficit.

There is a lot of discussion about stock levels in China and we believe that in total stocks in China could be as high as 3.3 million tonnes. However, there is no indication that the SRB is planning to sell its holding soon and a significant part of the rest is made up of stocks being used as collateral. If you add in stocks which are part of the normally supply chain, then this leaves available stocks in China at more like 1.2 million tonnes, which at current consumption rates is around 8 weeks supply.

Still Talk of Physical ETFs

Discussions about the launching of physically backed Exchange Traded Funds (ETFs) has been ongoing for quite a while now with the cable industry and other users of copper being quite vocal in their opposition to this. In the last month the SEC has announced that it finds no connection between metals ETF flows and commodity prices, and this brings the possibility of a physically-backed copper ETF as proposed by JP Morgan Chase a step closer.  This ruling has been challenged by a group of copper traders and consumers, including Southwire, Luvata and Encore Wire, who claim that these funds would remove a significant volume of copper from circulation in the short term, thus constricting supply and raising prices and volatility.  As we completed this article we have learned that the SEC has just approved the JP Morgan ETF and a separate one from Blackrock is also now likely to go ahead. The market will be watching with great interest to see what, if any, effect this has on the copper price and material availability.

So What is the Price Outlook for Copper?

The consensus of opinion amongst investors at present is that there are no strong signals from the market fundamentals. Meanwhile companies looking to buy copper are reluctant to make a move on the spot market due to the lack of clear direction. The recurrent themes at present are of limited activity and “waiting for next year” and so barring a substantial financial upset, we can only see the copper price continuing to drift sideways as the year draws to an end.  Thus we expect the price to finish the year in the fashion it has so far progressed; with a flat aspect which has (so far) resulted in the lowest standard deviation in daily prices since 2004, and with any fluctuations that do occur to be mainly caused by global economic news.

Looking further ahead we are forecasting a market surplus of a little over a quarter of a million tonnes in 2013, with a surplus of below 100,000 tonnes in 2014. In 2015 we start to see stronger growth in supply as the long expected boost to mine production starts to come on stream and as a result we are forecasting that the market surplus in 2015 could exceed 500,000 tonnes. As a result we expect that the copper price will remain relatively stable in 2013, before starting to ease as we go through 2014 in anticipation of the new rise in production. Then in 2015 the price should continue to move lower and could approach a low US$6,000 per tonne if our predictions of supply and demand prove to be accurate.

Implications for the Cable Industry

Relatively stable prices for 2013 would be welcomed by the cable industry and would reduce the risks that volatile copper prices can leave cable manufacturers open to. If, as is forecast, the copper price then starts to fall the cable industry will need to manage its business to limit any potential losses associated with holding high priced stocks, and it will also need to be prepared for falling turnover by value. On the plus side lower prices will reduce the cost of raw material and work in progress stocks which should ease some of the pressure on less well capitalised companies. A lower copper price may also reduce interest in looking at alternatives to copper.
 

Aluminium Price Remains Subdued

After a brief rally in the price of aluminium in September as a result of the US government’s announcement of a new round of Quantitative Easing and the announcement of the European Central Bank’s bond purchase programme, the price has now fallen back again. China’s SRB issued a tender to buy 160,000 tonnes of aluminium following reports that it could buy up to 400,000 tonnes, but strong production growth in China and weak demand in Europe means that the world market is estimated to be around 400,000 tonnes in surplus in Q4 2012. As a result the aluminium price is set to stay below US$2,000/tonne in Q4 and the average price for 2012 is forecast to be close to US$2,000/tonne which would be 16% lower than in 2011.

What are the Fundamentals Driving Aluminium?

The principal features of the aluminium market are high stock levels and rising production, which is outstripping demand growth. In 2012 the main driver of production growth was China, but looking ahead new capacity is also due to come on stream in the Middle East, Russia and China. As a result we are forecasting that global production will rise at a CAGR of over 5% over the next few years. Global demand will struggle to keep pace with this growth and as a result we are forecasting a market surplus of between 400,000 and 600,000 tonnes per year and this will lead to further growth in stocks, which will mean that the stock consumption ratio will remain above 90 days out to 2016.

Aluminium Price Outlook

With stocks set to remain high the outlook for the price remains subdued. CRU is forecasting only modest growth in the price in real terms up to around US$2,400/tonne by 2017 at 2012 prices. In contrast to the subdued price premiums are high as a result of long queues at LME warehouses and a shortage of physical metal. We expect these high premiums will continue for the next couple of years, before they start to reduce after this.

Other Metals: Zinc

Zinc?s main use in the cable industry is for galvanising steel wires and tapes used in armouring and overhead conductors. The zinc price has been subdued through 2012 like most metals, as a result of ongoing weakness in the global economy. The average three month price for 2012 is expected to be US$1,955/tonne which would be 12% lower than in 2011. The market is currently in surplus and this is forecast to remain the case for the next two years and as a result the zinc price is forecast to remain close to US$2,000/tonne.

Other Metals: Tin

Tin is a relatively minor element of metal consumption for the wire and cable industry as a whole, being primarily used for coating copper conductors used in some communication and LV energy cables. Its use has increased recently as many cables used in PV solar arrays use tinned copper conductors. As with other metals demand in 2012 has been fairly weak and in China the Yunnan provincial government has moved to take some 10,000 tonnes of tin out of circulation which should provide some market support and could perhaps encourage some consumer re-stocking. Global supply and demand remains fairly well balanced with a small deficit and stocks are running at around 5 weeks supply. As a result tin has traded in the range US$20,000 to US$22,000/tonne.

Other Metals: Steel

Steel is primarily used by the cable industry for armouring or strength members. The steel sector witnessed encouraging activity through the first half of 2012 as increased end-user demand in both developed and emerging economies drove q/q gains in global crude steel output of 6.1% and 2.8% in Q1 and Q2 respectively. However, market conditions deteriorated considerably in the third quarter. The Eurozone debt crisis contributed to reductions in output that outstrip what could be attributable solely to seasonal factors, while even China saw a definitive pullback in steel demand. Nevertheless, conditions in China appear to have turned a corner in recent weeks and growth looks set to progress at a firmer pace once again. Following expected gains of 5% in crude steel output in 2012, we are forecasting growth of nearly 6% in 2013. Steel rod prices had moved higher after the summer period, but in the last couple of weeks prices have moved slightly lower, with prices in 2012 set to be around 6% higher than in 2011. For all metal prices the strength of the US Dollar has an effect on prices and with this strengthening in the last few months this has contributed to recent soft prices.

 

Oil Price Relatively Stable

The oil price rose at the start of 2012 as a result of ongoing tensions around Iran?s nuclear policy and some supply outages. Since then the price has settled back down a little and the price of Brent Crude averaged around US$110/bbl in both Q2 and Q3. As we write this article it looks as if the price will stay around this level in Q4. Production has been increasing modestly and is currently keeping pace with demand, so in the absence of a further escalation of tensions in the Middle East the EIA is forecasting that the Brent price will
average US$103/bbl in 2013 compared to US$112/bbl in 2012.

 

With the oil price remaining relatively stable since Q1 of this year PVC and polyethylene prices have also stabilised once the higher prices in Q1 worked their way through the supply chain. If the oil price falls in 2013 we would expect polymer prices to follow it lower, although any reduction is likely to be quite small.

 

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