Panic Guides Global Copper Slump, Prices to Stay Low

Panic, not fundamental supply and demand, is behind a global copper slump that saw prices beaten from record highs to three-year lows in the space of a few months, a top industry think-tank says.

Juan Carlos Guajardo, executive director of Chile-based CESCO, a not-for-profit organisation, says the copper price plunge since October is mostly a product of an investor stampede from commodities to US treasuries, and is reflected in the sudden strength of the dollar in that period.

"What is happening here is that we are still seeing the price guided by a panic process," Guajardo told Reuters during an interview this week in Chile, the world's largest copper producer.

CESCO is a copper industry think-tank whose members represent local and international players, including copper company executives, academics, politicians and industry associations.

"The copper price is explained 93% by changes in the dollar-euro ratio, and the dollar-euro ratio is reflecting a world where investors are getting out of assets with levels of risk and into more secure US treasury instruments valued in dollars," he said.

Copper was down Tuesday at about $1.58 per pound, well below the more than $4 per pound prices it had been fetching just last July, as some big banks went bankrupt in the face of a widening credit crisis and global stock markets tumbled amid fears of recession in developed countries.

At the same time, the dollar has strengthened against most other currencies, particularly in emerging markets. In Chile, the dollar has gained 26% against the peso since July.

In the same period, the dollar surged around 17% against a basket of six major currencies, with the bulk of that coming after the September collapse of Lehman Brothers Holdings Inc.

Fundamentals take a back seat

So what has that to do with the global copper market?

"I don't think we are talking about fundamentals here," Guajardo said of copper. "The fundamentals have taken a back seat here."

Guajardo said in the most likely scenario, copper prices would hold current levels or a little higher over the next year or so, between $1.80 and $2.00 a pound.

He's confident of an eventual recovery, however, because sooner or later supply and demand will start to govern the price, and the market will discover that new output that was meant to come on line was sacrificed to the global crisis.

And existing production will prove less robust than in the past, as average global ore grades fall and no new major copper districts like Chile are developed.

Guajardo also said China's growth would continue and that eventually the world's largest consumer of the metal will have to go to market to restock inventories.

"I am under the impression that the world is in an irreversible shift in its centre of gravity to China, and they are aware of this," Guajardo said.

He said, however, that growth would still be slower there. And in the short term, for the next year at least, the market would continue to sting from the global economic slowdown.

Far less probable, but within the realm of possibility, would be the scenario of a US depression and an extended period of depressed global growth and high unemployment, and copper prices at cost levels of only the most efficient producers, at between $1.10 and $1.20 a pound.

On the flip side, and equally improbable, is a rapid recovery in the US accompanied by a return in global confidence and a reverse in investment flow from treasury instruments and back into commodities.

"That's one scenario," said Guajardo. "Its not very likely, but it is possible."

By Pav Jordan, Reuters