Asia Market Commentary

Dr. Copper the key to diagnosing this market

26/6/2012, Peter Esho, Chief Market Analyst, City Index

We watch the copper price on a daily basis. Its behavior is an important indicator for all other industrial commodities and hence that sentiment flows through on the Australian market and Australian dollar. It also impacts sentiment on the Hong Kong listed resource exposures and that flows through into the consumption names that are leveraged to China. Sentiment flows through the market. The copper price has fallen from highs above US$4 lb to US$3.60-65 and then in recent weeks back to US$3.30 lb where it is finding some very strong support. There is a whole school of thought out there that argues copper will only rise in value because new mines are becoming harder to commission and grades continue falling. The average industry grade at the moment, for established and commercial mines, is around 0.7 copper per tonne. The counter argument is that as China’s infrastructure investment ramps down, the marginal demand for copper will decline in coming years. The argument we think is somewhere in the middle. What happens in China is important because at the moment it is the key marginal consumer of copper and it’s not all export related. We estimate around 25 of total copper consumer by China ends up in domestic consumption of some sort. It’s hard to find exact statistics but let’s assume this to be true. Stock piles are what we watch closely and are better accurately measured by the London Metals Exchange in its warehouses. They have fallen from around 480,000 tonnes in October last year to around 240,000 tonnes this month. As inventories are drawn down, momentum in the spot price starts to improve. There can be a lag. If we go back further, this month’s 240,000 balance compares to peak warehouse levels of 550,000 tonnes at the end of 2009. Stockpiles bottomed in May this year at around 220,000. In summary, we think copper has found a bottom at US$3.30 lb and will slowly over the next few months start to drift higher back to the US$3.60-65 lb range. That will help boost beaten down resource names like BHP, Rio Tinto and Fortescue Metals even though these three companies are largely iron ore plays, something the copper price does not take into account. Hong Kong listed Glencore generates around 48 of its total earnings from metals and minerals, of which copper contributes around half. Following the actions of company directors, particularly when they start buying their own stock, is usually not always a good indicator that stock prices have temporarily bottomed. To that point we note that Fortescue founder and Chairman Andrew Forrest recently acquired $62m of Fortescue stock on market over the past few days.

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