VINACHEM

As bad news continues to pile up, Hindustan Copper chairman Shakeel Ahmed says prices of copper, which finds applications from wiring and plumbing to automobiles and consumer electronics, will remain uninspiring and range- bound in the short term. The International Monetary Fund lowering its global growth forecast to four per cent for this year and 2012 from the earlier 4.3 per cent and 4.5 per cent, respectively, could only lead operators to lighten their long positions in copper. Expect the market to take note of the IMF warning that the US and European Union could lapse into a recession and a decade of growth lost, unless governments of developed and emerging countries take some decisive actions.

Italian prime minister Silvio Berlusconi is dismissive of Standard & Poor’s downgrading of his country’s credit rating. But, to bankers, Italy’s credit rating lowering adds to the contagion risk generated earlier by Greek debts. The rising bond rates of many euro zone countries are a statement of the area’s deep economic malaise. As if all this was not enough bad news for commodities in general and copper in particular, the US new house construction data for August ,showing a fall of five per cent on July, are the worst in a three-month period. In developed economies in particular, copper finds extensive application in plumbing and electrical wiring. Ahmed says there is growing awareness in the developed world that use of door knob, and handle, made of copper are infection-preventive, particularly in hospitals. But only in better times, will this awareness will result in incremental demand. Now, however, the disappointing house start news from the US must have removed some support from copper.

No doubt, prices would have sought still lower levels had not Chinese August import of the metal gone up 11 per cent to 340,398 tonnes on July when imports rose 9.5 per cent on the month before to 306,626 tonnes. But the contracts for the imports that matured in August were made mostly during May to June. According to Aurubis, one of the world’s leading integrated copper producers, Chinese imports in the remaining months of this year will stay high, as copper stocks in warehouses are used up. Whatever commodity China is a regular importer, it will buy and build a comfortable inventory when prices are low. There will also be occasions when China will indulge in cross- trading by way of selling commodities in the world market when prices rule high.

The point remains had China not been pursuing a tight monetary regime, leading to more modest growth compared to what came to be the routine till the other year, the world perhaps would have seen bigger volumes of copper buying by a country accounting for as much as 38 per cent of world consumption. In the first seven months of 2011, Chinese copper imports were down 22 per cent year on year, a sure indication that the tight monetary policy has slowed demand. But China apart, when the US, the world’s second-largest user of the red metal and western European countries, which together use more copper than the US, are reporting disappointing industrial production, prices are more likely to take a knock. That’s what happened.

We have seen that whenever a big mine in Chile, Peru or in Indonesia is hit by a strike, copper prices move north. So, trust when reports surface that labour disputes at the world’s third largest copper mine in Indonesia owned by Freeport McMoran Copper & Gold, and at Peru’s Cerr Verde mine accounting for two per cent of the world copper output are getting resolved, the market will lose some steam. Copper prices here get set by trade rates at the London Metal Exchange. So far, as Ahmed explains, appreciation in the dollar value vis-a-vis our currency has offset the impact of price falls in copper.

Ahmed, who is leading his company to build copper ore mining capacity of 12.41 million tonnes by 2017 fiscal end from 3.6 million tonnes now is, however, “bullish about the commodity in the intermediate to long term”. While taking this stand, Ahmed must have put his bet on supply-side constraints. Mine owners in developed copper areas are contending with falling grades of ore that finally translate into higher production cost. Dollar appreciation will lead to higher new mines opening cost. Not many will dare to take a copper price view two to three years hence; such are the complexities of the present financial crisis. No one knows for sure how this is going to pan out.