Copper Q4 Outlook

By Leia Toovey- Exclusive to Copper Investing News

After rallying aggressively in 2010- analysts and investment firms had very bullish projections for copper’s price outlook for 2011, with forecasts ranging between $11,000 per tonne (Goldman Sachs) to 13,000 per tonne (Barclay’s Capital).  At the beginning of the year, Goldman Sachs (NYSE:GS) commented that they expected accelerating demand and shrinking stockpiles to buoy the metal above $11,000 per tonne. “We maintain our 12-month ahead copper price forecast of $11,000 per tonne and believe that prices could spike substantially above these levels, most likely in late 2011.”

Copper’s ascent only lasted through mid- February, as a slew of data and events that increased economic uncertainty snapped the red metal’s rally. After three-month copper hit a record high of $4.62 a pound on Feb. 14 on the COMEX ($10,190 on the LME) copper prices have seen a steep correction, with copper for three-month (December) delivery currently trading pinned to a price point of around  $8,900 per tonne, on the LME.

After the deceleration in copper’s rally, analysts have diverged in their forecasts for prices through the end of 2011. “The economic outlook is really weak,” David Thurtell, head of metals research at Citigroup Inc. (NYSE:C) said recently. “There’s not a lot to be bullish about base metals in the near term.” Last week, Citigroup lowered its 2011 copper price forecast by 6.2 percent to $9,099 a tonne citing the bank’s reduced economic growth forecast for the U.S., the euro zone and India. Compared with 2011, “we expect slower demand growth in 2011 across the major copper markets with Europe, China and U.S. demand growth slowing markedly,” Citigroup analysts said. Merrill Lynch (NYSE:BAC) also cut its LME copper cash price forecast for 2011 to $9,514 a metric ton from $10,225 per tonne and its 2012 estimate to $10,175 per tonne from $11,250 per tonne.

Despite projections  from both Merrill Lynch and Citigroup that copper will fall short of a $11,000 price point in Q4, there are others who think that despite copper’s recent weakness, $11,000 per tonne is still an attainable price. The Chairman of Lundin, in an interview with Bloomberg told reporters “I’m very bullish on the copper price because we can’t meet demand,” said Lukas Lundin. Lundin is joined by Peter Archbold, senior director and head of basic materials at Fitch Ratings with the bullish projection for the red metal. Copper prices could get close to $11,000 per tonne this year, underpinned by demand growth and a tight supply scenario. “Copper will remain in fundamental deficit this year and next year, with London Metal Exchange stocks falling to the equivalent of one to two weeks supply.”

Obviously, there is still is a great deal of uncertainty around what path copper prices will take in the third and fourth quarter of the year- due to questions surrounding the stability of the Eurozone, the path of the United States’ economic recovery, and, perhaps the most crucial point- skepticism over China’s demand for the metal. Confidence in China’s economy was recently stymied by a historic low reading for China’s services sector index in August. “I think Chinese participants are still waiting for more declines,” Zhuo Guiqiu, an analyst with Minmetals Futures, told the Wall Street Journal. “We saw a lot of Chinese buying when LME copper was around $8,000/ton, so I guess many people are still waiting.” Analysts say China will start importing more copper soon, but that buying hasn’t happened yet. Customs numbers released yesterday showed China’s copper purchases dropped 35 percent in February – the biggest decline in more than two years.

Another unpredictable factor that may have a great influence on prices in the months to come is supply threats- as a result of labour disputes. So far this year, a string of supply disruptions in Chile and Indonesia have limited the red metal’s downside. Workers at Freeport-McMoRan Copper & Gold Inc.‘s Grasberg mine in Indonesia may hold a one-month strike beginning Sept. 15 as labor-contract negotiations appear deadlocked, a union spokesman said Tuesday. With an already tight supply chain, a prolonged labour dispute may shift the market’s focus away from questionable demand and toward tight supplies. This, in turn, can add a great deal of upside to prices.

Securities Disclosure: I, Leia Toovey, have equity interests in Goldman Sachs Group Inc.