A debate continues to rattle on in the global copper market about whether a supply surplus will cap raging prices or whether a continued strain on supply will keep the red metal with a foot on the accelerator.
With preliminary data from international metals groups stating that the global refined copper market was in a surplus in the first quarter of 2006, some market players see a lid on the recent price rally and expect it to remain.
The International Copper Study Group, or ICSG, reported on May 18 that preliminary data showed that the global refined copper market was in surplus by 24,000 metric tons in February, or 52,000 tons after making seasonal adjustments.
Revised data for January-February 2006 indicates a cumulative production surplus of 77,000 tons, or 117,000 tons on a seasonally adjusted basis, the report said. This compares with a production deficit of 55,000 tons in the same period in 2005.
At the same time, the World Bureau of Metal Statistics, or WBMS, reported that a small surplus of 4,000 metric tons of copper in the first quarter of 2006.
"When (the ICSG and WBMS) said that the copper market was in a surplus, that relieved some upside pressure on the market. It was a confirmation that supply has begun to creep up and producers are able to increase output," said Jim Steel, senior vice president and metals analyst at HSBC Bank.
With those figures in the mix, the copper market appears to have shrugged off some recent bullish reports including news that the world 's biggest copper producer, Corporacion Nacional del Cobre de Chile, or Codelco, expects its output of copper to fall through 2007.
In 2006, copper output will drop to 1.71 million tons from 1.83 million tons in 2005, falling further in 2007 to 1.65 million tons, Codelco said.
By 2020, the company hopes to mine 2.5 million tons, he added. That is a drop from previous estimates of expanding output to 3 million metric tons by 2020.
"The market has gone up so sharply that it has already absorbed potential bullish news without making new highs," Steel contended, adding that even though supplies may be tight there is concern that demand has reached a peak.
But the counter opinion contends that copper fundamentals are among the strongest in the complex.
"Visible inventories remain well below critical levels, and thus consumers continue to be forced to exit the market," said analysts at Goldman Sachs. "We do not believe the market will be able to return to a significant surplus in the next 18 months, and thus believe that the upward price risk remains significant."
While demand remains strong, consistent with robust global economic activity, the Goldman Sachs analysts said supply continues to face disruption, citing the ongoing strike at Grupo Mexico 's La Caridad mine as well as a union 's vote to authorize a strike at Falconbridge Ltd. 's Lomas Bayas operation in Northern Chile while Sossego in Brazil continues to report operating problems.
"The prospects for future supply growth also remain under pressure. (Polish metals group) KGHM may drop plans for a new smelter in the Congo because of spiraling costs, and it is likely that these cost pressures will only continue to rise," the Goldman analysts said.
Barclays Capital in London said the new production targets released by Codelco caused some confusion.
"We understand that the near-term output figures are not fully comparable with last year 's output (with the 49% stake in El Abra probably making the difference)," said Barclays.
As a result, while production prospects in Chile are by no means bright, the decline suggested for 2006 output is probably an exaggeration of the real situation, they noted.
"So while the figures are price-supportive, they might not be as bullish as thought at a first glance. The longer-term outlook appears to have worsened quite significantly, however, and provide good justification for long exposure further out on the copper price curve," Barclays said.
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