Copper prices have been stuck in a range around $7,500 per tonne since falling sharply in the spring. And the red metal is set to slide further, says Capital Economics, because Chinese demand is overstated. As a result, the market, which is widely expected to be in deficit this year, is actually in surplus.
According to the International Copper Study Group (ICSG), Chinese copper consumption is growing by around 15% a year. Demand for copper is usually closely linked to the output of copper products, but over the past year this relationship has broken down: there is currently no growth in copper product output. Falling output of products that use a great deal of copper, such as air conditioners, bears this out.
The ICSG figure overstates demand because some copper is not put towards manufacturing, but is instead bought by traders for use as collateral for investments. Over the past year, there has been a major increase in copper stocks used for financial purposes, says Capital Economics. These go unreported, and the ICSG assumes there’s no change in the level of unreported stocks.
The upshot is that unreported stocks have expanded by almost one million tonnes since June 2011, reckons the consultancy. That implies supply outweighing demand this year. Throw in weakening consumption in Europe and Japan, and prices are likely to hit $6,000 by the end of the year.