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China Likely To Buy More Copper; Supplies Already Tight
By ANDREA HOTTER

ISTANBUL—China is likely to pick up its copper purchases in the second quarter, at a time when global supplies of the metal are forecast to be in a deficit of 500,000-600,000 metric tons.

The combination is likely to result in even high copper prices, executives at an international metals conference said Thursday. Copper prices recently hit all-time highs, reaching above $10,000 a metric ton in London and topping $4.60 a pound in New York.

China started buying less copper in the fourth quarter of 2010 and also began selling back material from bonded warehouses and contracted imports as a result of rising copper prices, said Andreas Hommert, head of research at Touradji Capital Management.

The world's largest copper consumer may now have reached a point where it needs to resume its purchases.

"The destocking process in China is probably relatively far progressed. Has destocking nearly run its course?" Mr. Hommert told the Metal Bulletin conference.

At the same time that China may resume its copper purchases, the market is likely to experience short supply of the metal.

Martin Squires, executive director of J.P. Morgan Securities, estimated the global market will be in a deficit of between 500,000 and 600,000 tons in 2011. This will be more pronounced in the second quarter due to seasonal factors influencing stock drawdowns, Mr. Squires said.

The range is narrower than a Dow Jones Newswires survey of 19 analysts in January, which included estimates of a shortfall of 90,000 tons to 825,000 tons.

Nikos Kavalis, a senior analyst at metals consultancy GFMS, said the copper market is likely to be in a deficit until 2013, with the most chronic shortage in 2011 at nearly 400,000 metric tons. The shortage is likely to narrow to around 200,000 tons next year and below 100,000 tons in 2013, he said.

"Output from new projects is likely to continue to fall short of targets," Mr. Kavalis said. "Declines at some existing operations will partly offset increases."

At the same time, disruptions will continue to affect output. Mr. Kavalis said strikes are likely given higher prices, while technical and operational disruptions cannot be ruled out. Political risk also remains an issue, he said, given the location of certain projects in countries like Afghanistan and Pakistan.

GFMS estimates that less than 600,000 tons of the roughly 800,000 tons of planned capacity expansions and production forecast for 2011 will actually occur. For next year, this figure is a little over 600,000 tons of 1.1 million tons planned and for 2013, around just 700,000 tons of more than 1.7 million tons planned.

With supplies tight and demand increasing, copper prices are likely to extend their gains, raising concerns about speculators moving into the market.

J.P. Morgan's Mr. Squires said supply-demand fundamentals are still key drivers of copper prices, the interpretation of which formulates investment decisions.

These decisions include those by the industry in terms of whether to invest in new capacity, as well as by the investment community, he said.

The debate over high copper prices has been centered on investment flows, Mr. Squires said. "The argument [that investors disproportionately influence copper prices] is levied at times of high prices, but investors are present in times of low prices too."

"Investment flows can influence market dynamics but ultimately they're respectful of the underlying fundamentals," Mr. Squires said.

Mr. Squires said prices could go higher still, although if the unrest in North Africa spreads through the Middle East this would be "very negative for global growth and copper prices."

"Taking the risk of contagion in the MENA region out of the equation, then copper has a very good chance of rising a lot higher," he said. "I don't think the industry is carrying a lot of stock, global PMIs are robust and in some places the best they've been in years. Could copper see a new high? Most certainly."

http://online.wsj.com/article/SB10001424052748704823004576192611371188594.html