{"id":59814,"date":"2012-04-18T13:30:06","date_gmt":"2012-04-18T03:30:06","guid":{"rendered":"http:\/\/www.fnarena.com\/index.php\/2012\/04\/18\/copper-to-weaken-before-improving\/"},"modified":"2012-04-18T13:30:06","modified_gmt":"2012-04-18T03:30:06","slug":"copper-to-weaken-before-improving","status":"publish","type":"post","link":"https:\/\/staging.fnarena.com\/index.php\/2012\/04\/18\/copper-to-weaken-before-improving\/","title":{"rendered":"Copper To Weaken Before Improving"},"content":{"rendered":"

\n\t – Copper expectations revised
\n\t – Weakness likely in coming months, prices may recover in 2H12<\/span>
\n\t – Deutsche and Citi<\/span> offer their preferred Australian exposures<\/strong>
\n\t <\/p>\n

\n\tBy Chris Shaw<\/p>\n

\n\tGiven concerns Chinese economic growth momentum will slow further in the June quarter, Barclays Capital sees increased risk for base metal prices in the short-term. To reflect this the group has trimmed its 2012 forecast for copper to US$8,803 per tonne<\/span> from US$9.000 per tonne<\/span> previously, though the expectation of stronger global growth in the second half of this year should be bullish for prices over coming months in Barclays' view.<\/p>\n

\n\tAs a result, Barclays suggests any dips in the copper price in the second quarter would be ideal buying opportunities, especially as declining head grades and delays to project ramp-ups are likely to continue to constrain supply growth.<\/p>\n

\n\tAnother point made by Barclays is that operating and capital costs for the copper industry continue to push higher, with marginal mine costs having jumped 26% in a year to around US$4,540 per tonne<\/span>. Capex<\/span> costs have also risen by nearly 30% since 2011 on the estimates of Barclays.<\/p>\n

\n\tFurther weakness in copper coming months but a strengthening in prices over the second half of 2012 is also the consensus view according to Thomson Reuters, as evidenced by the group's GFMS<\/span> Copper Survey 2012.<\/p>\n

\n\tIn terms of forecasts, consensus is for an annual average price this year of US$8,475 per tonne<\/span>, with a 1H12<\/span> average of US$8,305 per tonne<\/span> forecast. Driving the gains in the second half are expectations of continued monetary easing in Europe, North America and China in coming months and a still tight market balance.<\/p>\n

\n\tFollowing deficits in both 2010 and 2011, consensus is for a further deficit this year, albeit a smaller one than last year's estimated 256,000 tonnes<\/span>. A deficit is also likely in 2013, though the market should again be closer to balanced next year. <\/p>\n

\n\tThe survey by Thomson Reuters also picked up on the Barclays point of increasing production costs being a positive for the copper price, as it means the gap between the market price and the incentive price for new projects continues to close. <\/p>\n

\n\tLonger-term, Thomson Reuters notes the view that the dominant supportive factor for the copper market, of constrained supply, remains in place. This leaves a positive view on copper's medium-term price prospects.<\/p>\n

\n\tAs Standard Bank notes, over the last three years China has consumed on average around 2.8 million tonnes<\/span> per year more refined copper than is produced domestically. This year should see a similar outcome, before an increase to more than 3.0 million tonnes<\/span> per year in 2013.<\/p>\n

\n\tChina's imports are primarily monthly contracted tonnages<\/span>, supplemented occasionally by the opening of the SHFE-LME<\/span> arbitrage window that attracts more physical buying. But Standard Bank notes a recent additional driver, which is demand for copper as collateral for financing purposes.<\/p>\n

\n\tThis financing aspect creates a dislocation between real and apparent Chinese demand, one Standard Bank suggests will only be resolved by an eventual normalisation<\/span> of Chinese monetary policy and increased economic activity. <\/p>\n

\n\tAs the latter appears unlikely in the shorter-term, Standard Bank sees scope for lower Chinese imports, higher exports and weaker apparent demand to disappoint the market well into the second half of this year. The Chinese inventory overhang should continue to weigh on prices.<\/p>\n

\n\tThis week is CECSO<\/span> Copper Week in Chile and leading into the conference RBS<\/span> remains of the view copper is the only metal likely to enjoy a supply shortfall in 2012. A further positive is China remains structurally short the metal, which should underpin the market going forward.<\/p>\n

\n\tA key point according to RBS<\/span> will be supply growth in coming years, with the debate likely to be will 2013 or 2014 be the start of significant increases in supply as planned new projects come on-stream.<\/p>\n

\n\tThe expected market deficit this year leaves copper as RBS's<\/span> preferred base metal, the broker forecasting prices will average US$8,735 per tonne<\/span> this year and moving close to US$9,000 per tonne<\/span> by late 2012.<\/p>\n

\n\tTurning to the Australian copper producers, Deutsche Bank has previewed the sector leading into March quarter production reports. As with Barclays and Thomson Reuters, Deutsche expects prices will improve over the course of 2012. <\/p>\n

\n\tForecasts currently stand at US$8,313 per tonne<\/span> for the June quarter, rising to US$8,798 per tonne<\/span> in the September quarter and US$8,996 per tonne<\/span> in the final quarter of this year. Prices should ease to US$8,313 per tonne<\/span> on average in 2013.<\/p>\n

\n\tIn playing the sector, Deutsche suggests ongoing cost pressures favour<\/span> low cost producers. This leaves PanAust<\/span> ((PNA<\/span>)) as the broker's top pick in the sector thanks to low cost production growth from the Phu<\/span> Kham<\/span> and Ban Houayxai<\/span> assets.<\/p>\n

\n\tAlso rated as a Buy is OZ Minerals ((OZL<\/span>)), as Deutsche sees upside from growth via a strong balance sheet and an ongoing active exploration program. OZ Minerals also offers strong leverage to long-term copper prices thanks to the Carrapateena<\/span> project. <\/p>\n

\n\tSandfire<\/span> Resources ((SFR)) is rated as a Hold by Deutsche as while the DeGrussa<\/span> project is an attractive one this appears priced into the stock at current levels. As well, Sandfire<\/span> appears the least leveraged to the longer-term copper price given a current seven year mine life.<\/p>\n

\n\tCiti<\/span> has also assessed the relative merits of PanAust<\/span> and OZ Minerals, noting there is little difference between the two companies with respect to existing businesses as both trade on similar multiples and discounts to net present value.<\/p>\n

\n\tWhile PanAust<\/span> has a slightly longer mine life, this is balanced by the fact OZ Minerals has higher grades and better potential for cash generated. Adding in growth projects, which means Inca de Oro for PanAust<\/span> and Carrapateena<\/span> for OZ Minerals, the balance tilts in favour<\/span> of the latter in the broker's view.<\/p>\n

\n\tThe reason is Carrapateena<\/span> could extend the production profile of OZ Minerals into the next decade. This upside, when added to a safer sovereign location and cash return potential is enough for Citi<\/span> to favour<\/span> OZ Minerals among the two stocks.<\/p>\n

\n\tCiti<\/span> has a Buy rating on both PanAust<\/span> and OZ Minerals at current levels, noting recent share price weakness has both stocks trading at discounts to base business net present values. Base business net present value removes all exploration upside and growth options from the portfolio.<\/p>\n

\n\t
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Across the market copper price expectations have been updated, with pressure anticipated in coming months before a pick-up in prices in 2H12.<\/p>\n","protected":false},"author":9,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[59],"tags":[23],"acf":[],"_links":{"self":[{"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/posts\/59814"}],"collection":[{"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/users\/9"}],"replies":[{"embeddable":true,"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/comments?post=59814"}],"version-history":[{"count":0,"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/posts\/59814\/revisions"}],"wp:attachment":[{"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/media?parent=59814"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/categories?post=59814"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/tags?post=59814"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}