Copper Rising at Goldman Isn't Traditional Rebound

NEW YORK, Sept. 15 -- Copper, this year's best commodity investment, may be poised for gains of another 22 percent through 2010 as the global economy recovers and mine output lags behind demand.

    Prices, which surged this year as China unexpectedly doubled imports, are rising now because sales of new homes and durable goods in the U.S. are increasing as the worst recession since the 1930s abates. At the same time, producers have cut back on mine investments, limiting supplies, according to the International Copper Study Group in Lisbon.

    "We remain most constructive on copper" because "higher leverage to robust Chinese growth and limited spare production capacity" will drive prices up more than for any other industrial metal, Goldman Sachs Group Inc. analysts led by Janet Kong and Jeffrey Currie said in a report last week.

    The median forecast of 23 analysts surveyed by Bloomberg in January was for a 49 percent drop this year to an average of $3,525 a metric ton on the London Metal Exchange, after prices fell from a record $8,940 in July 2008. Instead, the metal used in everything from plumbing and car parts to household appliances and power lines doubled to an 11-month high of $6,549 on Aug. 28. Before today, the average this year was $4,591.

    Copper will jump to $7,650 a ton, according to the Sept. 8 report by Goldman, which raised its forecasts three times since saying in January that prices would fall. The bank now expects a 22 percent gain from $6,250 on Sept. 11. Citigroup Inc., which also predicted lower prices at the start of 2009, said Sept. 4 that the average will be $6,430 in 2010, up 21 percent from $5,300 expected this year.

    China Demand

    Copper fell 1.8 percent to $6,140 a ton today in London. A year after the collapse of Lehman Brothers Holdings Inc., the metal has declined 14 percent.

    Demand from China, the biggest user, increased after the government pledged 4 trillion yuan ($585 billion) to stimulate the economy and banks made a record $1.1 trillion of loans. Factory output in the world's fastest-growing major economy climbed 12.3 percent last month from a year earlier, the most since August 2008, the statistics bureau said Sept. 11. Imports of copper and products jumped 76 percent to 3 million tons in the first eight months, preliminary customs data show.

    In the U.S., the government said on Aug. 26 that new-home purchases jumped 9.6 percent in July, the most since February 2005. Builders are the biggest copper consumers, using about 439 pounds (199 kilograms) in the average home. Orders for durable goods climbed 5.1 percent in July, the most in two years.

    Freeport Cuts

    Copper supplies may tighten because mining companies became pessimistic last year. Phoenix-based Freeport-McMoRan Copper & Gold Inc., the world's biggest publicly traded producer, is cutting output by about 7 percent in North America and South America in 2010 from last year. The company slashed production and fired workers as prices plunged 68 percent last year from the record to a four-year low of $2,817.25 on Dec. 24.

    Freeport cut about 400 million pounds of production this year in North America and plans additional reductions of 200 million pounds in 2010 and about 100 million pounds in South America, Eric Kinneberg, a company spokesman, said in an e-mail. Output next year will be 3.8 billion pounds, 17 percent less than Freeport planned in October and down from the 4.066 billion last year.

    "The decision to restart production is dependent upon a number of considerations," Kinneberg said. "Most importantly, we would require a sustained improvement in economic conditions and demand for copper such that the economics of restarting production are favorable."

    Speculator Holdings

    Investors in copper futures on the New York Mercantile Exchange's Comex unit are getting more bullish. Hedge funds and other large speculators slashed net-short positions, or bets prices will fall, 92 percent from a February peak, government and exchange data show.

    Freeport probably will earn about 86 cents a share in the third quarter, based on the median of estimates from 17 analysts surveyed by Bloomberg. In January, the consensus forecast was for a loss of 6 cents.

    Not everyone expects the rally to continue. Michael Aronstein, the chief investment strategist at Oscar Gruss & Son Inc. in New York who predicted the 2008 commodity collapse and this year's rebound, said he has shifted to "neutral" on commodities and is selling some assets, after putting 20 percent of the money he manages into raw materials in March.

    Inventory Gains

    "My concern is that the whole China theme got very overdone, and that scared us," Aronstein said. "I'm skeptical about China leading the world out of recession. We started cutting our investments. Most of the selling we did was in the industrial sector."

    China's purchases of refined copper fell for a second month in August, according to the Beijing-based customs office. Stockpiles monitored by the LME rose 12 percent to 298,925 tons in July and August and have increased every day this month.

    The U.S. recovery also may be slow to regain ground lost in the recession, with unemployment at a 26-year high of 9.7 percent and this year's budget deficit at a record $1.6 trillion.

    Bruce Kasman, the chief economist at JPMorgan Chase & Co., said the slump was so deep that the 3.5 percent average quarterly growth rate he sees in the next year won't bring gross domestic product back to its $13.42 trillion peak.

    Chile's government-owned Codelco, the world's largest copper producer, plans to boost output for the first time in five years. The gain will be "at least" 120,000 tons, or about 8 percent, Santiago Gonzalez, the nation's mining minister and the company's chairman, said in a Sept. 10 interview.

    Wall Street Miss

    A Bloomberg survey of 11 analysts shows New York futures will drop to an average of $1.8475 a pound ($4,073 a ton) in 2010 before rebounding the next three years.

    Wall Street has been wrong on copper so far this year. Citigroup raised its forecast "a few times" because "Chinese demand has continued to surprise on the upside," David Thurtell, an analyst at the bank in London, said in an e-mail response to questions on Sept. 11.

    "People who've stayed away from copper have been severely punished," said Michael Pento, the chief global strategist at Delta Global Advisors Inc. who predicted in March that prices would jump at least 77 percent this year. "Back in January, when I was so bullish on copper, people thought I was crazy. Now, my phone is ringing all the time."

    Goldman's forecast for copper is more bullish than its estimates for any other base metal. The bank expects aluminum and nickel to gain about 11 percent each by the end of next year, while zinc adds 16 percent.

    Depression Bet

    In the January survey, Goldman said copper would average $4,167 in 2009, 10 percent less than this year's actual average. New York-based Citigroup, which had the most bearish forecasts, said then that prices would average $2,756 this year.

    "Investors were betting on a depression and they didn't want anything to do with anything tied to the economy, like copper," Pento said by telephone from his office in Holmdel, New Jersey. "They're late to the game."

    Growth is recovering faster than analysts expected in the U.S., the second-largest copper user. The economy will expand 2.75 percent in the third quarter, based on the median estimate of 76 economists surveyed by Bloomberg, compared with a March forecast of 0.5 percent.

    Mine Spending

    Copper in New York is 33 percent below last year's record, so inflation isn't expected to stifle demand. Analysts forecast U.S. consumer prices will shrink 0.5 percent this year, and rise 1.9 percent for 2010, the smallest gain in eight years, according to the median of 66 estimates in a Bloomberg survey.

    Analysts also say output is failing to keep pace with demand. Goldman forecast a production deficit of 88,000 metric tons next year, enough for wiring and plumbing in more than 440,000 homes.

    Citigroup expects the shortfall to widen to 144,000 tons by 2011, the largest gap since 2004. Capital spending will total $47.8 billion this year, 13 percent less than earlier forecast, Citigroup said on Aug. 31.

    Chile, the largest source of the metal, reduced output from year-earlier levels for 14 straight months. Its Escondida mine, the world's biggest, shut a mill for 45 days. The Collahuasi mine run by Zug, Switzerland-based Xstrata Plc and London-based Anglo American Plc will lose 20,000 tons after an electrical fault halted a conveyor belt, Claire Divver, an Xstrata spokeswoman in London, said July 28.

    Fewer Projects

    Minera Escondida Ltd., the mine operator controlled by Melbourne-based BHP Billiton Ltd., said first-half output fell 28 percent from a year earlier. BHP workers are threatening to walk out at Escondida if the company doesn't meet demands to share record profits. The current labor contract expires in December.

    The International Copper Study Group said July 10 that fewer mine expansions are planned for 2009 through 2011. The organization cut its estimate for the annual increase in global production capacity to 666,000 tons, from the 850,000-ton growth forecast in March.

    If copper consumption remains at about 18 million tons annually, as it is this year, the world will run out in 31 years, according to the U.S. Geological Survey.

    Copper will continue to rise even if China's imports ease, said Bob Takai, the general manager of financial services at Tokyo-based Sumitomo Corp. Prices may reach $7,000 a ton at the end of this year on the LME, from $6,250 on Sept. 11, he said.

    "Even if the speed or pace of these imports is slowing down a little bit, still, they are buying a lot of copper from the global market," Takai said.

    (Source: Bloomberg)