AN INSIGHT INTO COPPER
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CONTENTS Introduction Factors Affecting Copper price Supply & Demand of Copper The Volatility of Commodity Prices The Effect of Rising Copper Prices World resources Substitutes Technical View Composite Indicators Short Term Outlook Long term Outlook
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Introduction Copper was the first mineral that man extracted from the earth and along with tin gave rise to the Bronze Age. As the ages and technology progressed the uses for copper increased. With the increased demand, exploration for the metal was extended throughout the world laying down the foundations for the industry as we know it today. Copper is the third largest consumed metal after steel and aluminum in the world. Copper is used as electrical conductor, construction material and as components in telecommunications and alloys. Copper is an excellent conductor of electricity, as such one of its main industrial usage is for the production of cable, wire and electrical products for both the electrical and building industries. The construction industry also accounts for copper's second largest usage in such areas as pipes for plumbing, heating and ventilating as well as building wire and sheet metal facings. World copper production Region
Source: WBMS www.world-bureau.com
%
Asia 43 America 32 Europe 19 Africa 4 Oceania 2 Total
100
Industrial consumption Industry
Source: Standard CIB Global Research www.standardbank.co.za
%
Electrical/Electronic 42 Construction 28 Transportation 12 Consumer/General 9 Industrial 9 Machinery Total
100
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Factors affecting copper prices The wide production base means there are numerous factors that can affect production and therefore prices. In North and South America, production is often affected by labor unrest, in parts of Asia and Africa production can be affected by political unrest; take for example the closures of the Bougainville mine in Papua New Guinea and the decimation of production in Zambia. In addition, weather is an important factor affecting supply, with floods and droughts either hitting the production process or the transport of raw materials. New production also takes years to commission as the scale of mining is large, it takes enormous financing, requires endless environmental permissions and needs extensive infrastructure as well. All these factors make it hard for the market to balance supply and demand. With such a large and diverse market it is little surprise that copper's fundamentals are continuously changing and as they do, so does the price. The copper prices change constantly as the market attempts to balance supply and demand at any given time. These price fluctuations generate risk and opportunity to different participants in the market and the metal exchanges around the world provide the means for all those involved with the market to either hedge their risk or take on risk as an investor or speculator. Below is a table which depicts supply and Demand of Copper by major Copper producing and consuming economies, Their Supply and Demand and their expected Demand and Supply, Their expected Supply demand in next half of 2011.
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ďƒ˜
The world’s Demand of and Supply of copper
Demand Global consumption was reported at 17,800 (Kt) in 2009, which increased 10.1% to 19,601 (Kt) in 2010. Many people would argue that at some point copper prices will become so extreme that it will eventually lead to demand
destruction.
Currently
Barclays Capital does expect global consumption to grow about 4.2% in 2011. In aggregate the expected copper shortfall is anticipated to be about 825 (Kt) in 2011. In other words, copper demand will exceed the supply and as such inventories are expected to be lower at the end of 2011 from where they stand currently.
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Supply Global production of copper was 18,256 (Kt) in 2009 and increased to 19,152 (Kt) in 2010. While this was a 5% to 6% increase year over year (depending on how you account for the “disruption allowance” factor) it is below the market expectation for production growth which was 8%. While this might seem inconsequential, it is actually a substantial shortfall. Global copper production increased only 5% to 6% in 2010 despite a 46% increase in the average price of copper from $2.34/lbs in 2009 to $3.42/lbs in 2010. Talk about inelastic supply! Currently Barclays Capital projects copper production to increase 2.3% to 5.5% (depending on global disruptions expectations).
Copper Supply Constraints Copper is similar to many other commodities in that the vast resources are typically located in countries that are developing politically and economically. Oftentimes these countries are prone to shocks such as labor strikes. It seems fairly logical to argue that as the flat price of copper (i.e. cash copper prices) rise further and further, “labor” becomes increasingly concerned that they are not getting what they see as their fair share of the prosperity. As such, strikes, sometimes violent and very disrupting, can and do occur. If copper at $3/lb provides temptation for labor to take a stab at increased wages, copper over $4/lb makes that temptation far greater. Many leading mines across the globe that were developed over two decades ago are yielding ore with less and less metal content. Production at Escondida, the world’s largest copper mine, is anticipated to drop as much as 10 % in the next 12 months because of lower grades. Due to shortage of domestic mines and a low percentage of productivity in the existing mines, India is already suffering loss in the level of production for Copper. Rising prices are attracting companies to start newer venture but copper mining projects take a long time to commence. Hence, no new major copper supply will be seen in 2011 further tightening the inventory situation.
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The China and India effect Growing economies e.g. China and India are among the largest demand sources for industrial metals since the beginning of the last decade, and are responsible for at least 30% to 45% of all base metals consumption. India accounts for 3% of the global output but still has to depend completely on the copper ore imports. China’s State Reserves Bureau (SRB) will buy more refined copper in 2011 even as the prices hover near a record high, though the buying would not be that aggressive. Overall, India and China’s copper imports are expected to go up this year and demand is also likely to rise by 7% in 2011 from last year. South Korea’s Public Procurement Service is also looking to raise copper stocks to 46 days of consumption in 2011 from 2010’s 42 days. The pace of depletion in copper inventories at London Metal Exchange monitored warehouses is also indicative of a very strong demand outlook amid tight supply. In the past one year, copper stocks at LME-monitored warehouses have declined nearly 25%. The world’s growing economies may choose to increase interest rates in an attempt to curb liquidity and control inflation. The People’s Bank of China has already increased key one-year lending and deposit rates by 25 basis points effective from 18 th Feb 2011. Another fear is of the substitution. Rising copper prices will encourage use of other metals in plumbing & construction. Substitution will pull out around 3% of the copper in 2011. But at the same time, new usage like electric and hybrid cars should make up for the loss of demand caused by substitution. Since the fundamentals of the metal are strong, such negative factors could only drag copper prices down for a short period. Most copper ore is mined or extracted as copper sulfides from large open pit mines in copper porphyry deposits that contain 0.4 to 1.0 percent copper. Over 40 per cent of world copper supply comes from North and South America; 31 per cent from Asia and 21 per cent from Europe.
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Estimated Copper Consumption versus Domestic Production – China
ďƒ˜
The volatility of Commodity Prices
As we have seen, price volatility stems from a lack of responsiveness of both demand and supply in the short term, i.e. both demand and supply are assumed to be inelastic in response to price movements.
The low price elasticity of demand for copper usually stems from a lack of close substitutes in the market. For some products and processes, aluminum or plastic may act as a substitute to copper for some uses, but there are costs and delays involved in switching between them.
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The elasticity of supply is also low. Supply is usually unresponsive to price movements in the short term because of the high fixed costs of developing new extraction plants which also involve lengthy lead-times. If existing copper mining businesses are working close to their current capacity then a rise in world demand will simple lead to a reduction in available stocks. And as stocks fall, so buyers in the market will bid up the price either to finance immediate delivery (the spot price) or to guarantee delivery of copper in the future (reflected in the futures price). It can take huge price swings in the market for supply and demand to respond sufficient to bring the market back to some sort of equilibrium.
The Effects of Rising Copper Prices The demand for copper will continue to remain strong provided that the global industrial sectors continue to expand production. But if price remain high then we can expect to see some shifts occurring. For a start, copper can be recycled although the costs of doing so are often high and there are fears concerning the negative externalities arising from the pollution created by trying to recycle used copper. These external costs include atmospheric emissions from recycling plants and waste products dumped into rivers. Nonetheless price theory would predict an increase in demand for scrapped copper and perhaps a substitution effect away from copper towards aluminum. And in the medium term high prices and emerging new technologies may cause an even bigger shift in demand away from copper based products. Plastics provide lower material and installation costs for businesses. And the take off in wireless technology and fiber optics will also have an impact. And higher prices might also be the stimulus required for an expansion of copper ore production as supply responds to the incentives of increased potential revenues and profits. In recent years, copper mining production has fallen short of expectations. But as with any market, if the price is high enough suppliers will eventually respond!
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World Resources:
A recent assessment of U.S. copper resources indicated 550
million tons of copper in identified (260 million tons) and undiscovered resources (290 million tons).8 A preliminary assessment indicates that global land-based resources exceed 3 billion tons. Deep-sea nodules were estimated to contain 700 million tons of copper.
Substitutes: Aluminum substitutes for copper in power cables, electrical equipment, automobile radiators, and cooling and refrigeration tube; titanium and steel are used in heat exchangers; optical fiber substitutes for copper in some telecommunications applications; and plastics substitute for copper in water pipe, drain pipe, and plumbing fixtures. it seems logical to assume that demand for copper could go way down in coming years. After all, conductors, power cables and other wires are being made with aluminum, which is also a very good conductor of electricity, and is lighter and much cheaper. But how likely is it that everyone will all of a sudden stop using copper in lieu of aluminum? The bears argue that copper is far heavier and more expensive than aluminum. True. But that has always been the case. And in recent years, you can bet that anywhere it was feasible to replace copper with aluminum it was done. That’s evident by the rise in aluminum prices. There is no doubt whatsoever that aluminum has replaced copper in wires, conductors and various electrical parts – especially as copper prices have more than tripled recently. But the increase in aluminum has not had any major effect on the demand for copper. In fact, demand for both metals has soared in tandem. One has not risen at the other’s expense. And anyone who would have you believe that you could one day stop using copper altogether in lieu of aluminum should consider this one fact: If you took all the aluminum stockpiles in the world, it would only be enough for nine days of global consumption. In other words, even if aluminum could be used to replace copper in every function under the sun (which it could not) we would only have enough to last nine days. Copper is in not in the danger of being totally replaced just yet.
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The developing world needs both metals – not just one. In next section, we have illustrated our technical view on Copper by presenting its various averages, Fibonacci retracement levels, Expansion levels and in-depth analysis using various technical indicators on different time frames of charts supporting our technical view, and on the basis of these our technical target on Copper.
TECHNICAL VIEW Copper CMP - $399.75
Target Price - $510
Moving averages Moving Averages Daily Weekly
20 Day $415.10 $434.27
50 Day $426.00 $384.81
100 Day $433.40 $343.80
200 Day $414.53 $315.38
Fibonacci retracement levels SCRIPT Copper
0.0% $125.08
23.6% $195.46
38.2% $240.18
50.0% $275.36
61.8% $310.55
100.0% $427.00
131.8% $522.45
Expansion levels SCRIPT
38.2%
61.8%
100%
138.2%
161.8%
Copper
$364.40
$421.92
$516.04
$608.86
$666.38
Monthly Pivot SCRIPT R4 R3 R2 R1 P S1 S2 S3 S4 Copper $577.58 $521.18 $464.78 $432.27 $408.38 $375.87 $351.98 $295.58 $239.18
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Composite Indicators
Signal
Strength
Direction
TrendSpotter
Sell
Maximum
Weakening
Short Term Indicators 7 Day Average Directional Indicator
Sell
Average
Weakening
10 - 8 Day Moving Average Hilo Channel
Sell
Weak
Weakening
20 Day Moving Average vs Price
Sell
Strong
Weakening
20 - 50 Day MACD Oscillator
Sell
Weak
Strongest
20 Day Bollinger Bands
Hold
-
Rising
Short Term Indicators Average: 80% Sell Medium Term Indicators 40 Day Commodity Channel Index
Sell
Average
Weakening
50 Day Moving Average vs Price
Sell
Strong
Strengthening
20 - 100 Day MACD Oscillator
Sell
Weak
Strongest
50 Day Parabolic Time/Price
Sell
Average
Weakest
Medium Term Indicators Average: 100% Sell 60 Day Commodity Channel Index
Sell
Strong
Weakening
100 Day Moving Average vs Price
Sell
Average
Strengthening
50 - 100 Day MACD Oscillator
Sell
Weak
Strongest
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Support/Resistance Levels
Price
Key Turning Points
7.3365
Price Crosses 18-40 Day Moving Average
6.6
Price Crosses 9-40 Day Moving Average
6.195
Price Crosses 9-18 Day Moving Average
14 Day RSI at 80%
5.6698
14 Day RSI at 70%
4.8351
13 Week High
4.623
52 Week High 4 Week High
4.398 4.3476
38.2% Retracement from 13 Week High
4.336
Price Crosses 40 Day Moving Average Stalls
4.2625
50% Retracement from 13 Week High/Low
4.2531
Price Crosses 40 Day Moving Average
4.2352
14-3 Day Raw Stochastic at 80%
4.2085
38.2% Retracement from 4 Week High
4.194
Price Crosses 9 Day Moving Average Stalls
4.1936
14-3 Day Raw Stochastic at 70%
4.1825
Price Crosses 18 Day Moving Average Stalls
4.1774
38.2% Retracement from 13 Week Low
4.1673
14 Day RSI at 50%
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Current Price
4 Week Low
4.1533
Price Crosses 18 Day Moving Average
4.15
50% Retracement from 4 Week High/Low
4.1102
14-3 Day Raw Stochastic at 50%
4.0915
38.2% Retracement from 4 Week Low
4.0642
3-10-16 Day MACD Moving Average Stalls
4.027
14-3 Day Raw Stochastic at 30%
4.0257
Price Crosses 9 Day Moving Average
3.9853
14-3 Day Raw Stochastic at 20%
3.9605
Current Price
3.9396
14 Day %d Stochastic Stalls
3.9161
38.2% Retracement from 52 Week High
3.902
13 Week Low
14 Day RSI at 30%
3.8977
14 Day %k Stochastic Stalls
3.8407
3-10 Day MACD Oscillator Stalls
3.7751 3.6977
50% Retracement from 52 Week High/Low
3.4794
38.2% Retracement from 52 Week Low
14 Day RSI at 20%
3.2849
52 Week Low
2.7725
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Short Term Outlook:If we look at Copper weekly chart and simply apply a Fibonacci retracement of its recent uptrend starting from May 2010 to its peak of $464.10 in Feb 2011, we can see that Copper has corrected 38.2%. Further, the RSI is at 45.15 on weekly chart and is on over all downtrend taking resistance of trendline. Below 50 RSI indicates a bearishness of Copper in near future. Copper from here have a downside and it can correct to 50% that is at $368 where we meet our long standing support trendline which is drawn from the troughs of December 2008. In our short term outlook we expect Copper could correct further and may test the level of $368 - $370.
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Long Term Outlook:In our long term outlook for copper, we are bullish on the upside and see 15% – 20% return once it completes its short term correction. We have seen an expansion of coppr prices from $125.35 to $365.50 from where it retraced to $270 and headed for its next uptrend. Currently, Copper is ranged between 61.8% to 38.2% and is seeing a correction. From here Copper on the maximum can test the level of $368 - $370 and from then create a next uptrend to its 100% expansion which coincide with our target of $510- $520.
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In our next chart, we have shown the expansion of copper from its 2nd rally starting from $271.96 to $464.10. After making a peak at $464.10 it saw profit booking and came down to $384.50. Now, as our short term outlook goes, it could retrace to 76.4% where it meets our technical long term target of $510.
In this chart, we have shown copper retracement from peak of $427 to lows of $125.35. Copper has retraced 100% of this decline and is seeing minor correction / profit booking and may come down to test its lower support line at $365 - $370 which is also our short term target and from here next retracement of copper is at 138.2% which coincides to our technical target of $510 - $520.
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