Forecasts were released as global metals players gathered in London for the annual London Metal Exchange dinner to swap market insights and to negotiate refining and other contracts. While global economic outlooks vary for 2006, most analysts agree that key metal consuming economies will continue to grow, albeit at a slower pace, just as more supply comes on line.
For the first time in three years, copper, which set a series of all-time highs in 2005-the most recent at $4,018 a tonne for LME 3-months largely due to supply constraints-looks likely to show a surplus next year.
But, according to Mitsui Bussan Commodities research report, "The 123,000 tonne surplus forecast for 2006 pales in significance in the context of 1.25 million tonnes of deficit over the last three years and annual usage exceeding 17.50 million tonnes."
Mitsui forecasts the LME cash settlement price will average $3,538 a tonne in 2006, with a higher than ususal margin for error, given that price swings have been unusually wide.
Standard Bank, which expects a small surplus of 263,000 tonnes in 2006 and 450,000 tonnes in 2007, put the price at a $3,125 a tonne average for 2006 and slipping to $2,425 in 2007.
HSBC, in its Base Metals Outlook, projects an average LME cash copper price of $3,086 in 2006 that will fall to an average $2,646 a tonne in 2007 with a surge in new mine supply. "As copper mines revert to more normal mining patterns, we expect mine production to increase by 8.0 percent next year to 16.5 million tonnes," said the HSBC report.
While most forecasts over estimated the amount of new copper to come on line in 2005 because of plant failures, labour disputes, and natural disaster, next year several big miners have already said production now in the pipeline will come on stream.
Persistent bottlenecks at smelters that also constrained supply in 2005 should be alleviated in 2006, underpinned by massive Chinese investment, as well as increased production in India, North America, Latin America and Africa. The outlook for copper demand relies mostly on global growth, but several factors should underpin red metal prices despite overall economic activity. Standard Bank's outlook calls for around 4 percent per annum demand growth in both 2006 and 2007, with global copper consumption reaching 18.49 million tonnes at 2007 year end. "China will continue to lead this expansion, but all regions are expected to experience positive growth," the report said.
China's booming industrialisation process may decelerate, but is expected to continue growing at very strong rates. Furthermore, as Macquarie Research points out, this year's heavy destocking of metals inventories means that a demand bounce could be surprisingly strong. "Given the low absolute level of global stocks, prices will remain extremely sensitive to even a few unplanned supply disruptions of the nature we have seen this year to pull the market right back towards balance," said Standard Bank.
Substitution of other products for high-priced copper may continue in 2006, but Mitsui points out that telephony and plumbing-sectors most at risk-had already been challenged. And some analysts said competing products, like plastics in tubing, would also see sharp price gains if oil stays high.