Goldman, JPMorgan See Copper Rally Stalling on Low China Imports

Jan. 31 (Bloomberg) -- Copper’s best start to the year since 2008 may stall as China, the biggest user, is likely to buy less metal in the coming months, according to Goldman Sachs Group Inc. and JPMorgan Chase & Co.

China’s imports are set to fall “sharply” over the next quarter after the country stocked up on as much as 300,000 metric tons of the metal since September, Goldman Sachs Group Inc. said in a report today. The country’s imports from spot purchases will be “modest” in the first quarter and may pick up in the second quarter if prices retreat into “value territory” of $7,200 to $7,500 a ton, JPMorgan said in a report.

Copper for three-month delivery has rallied 10 percent this year to $8,385 a ton on the London Metal Exchange on falling stockpiles and signs demand may be improving in China and the U.S. The LME Index of six main metals traded on the exchange advanced 12 percent since Dec. 31, led by a 27 percent advance in tin and 14 percent gain in zinc.

"Better than expected macroeconomic data together with a reduction in perceived ‘tail risks’ in Europe and China drove the rally in the LME price,” Max Layton, a London-based analyst at Goldman, wrote in a report e-mailed today. "However, it appears, the rally could be a little ‘too much, too soon.’”

Reports this month showed American unemployment and Chinese inflation eased and German investor confidence jumped. The U.S. Federal Reserve pledged to keep interest rates low through 2014 and laid groundwork for the third round of large-scale asset purchases.

Stockpiles Decline

Refined copper imports by China surged to a record 406,937 tons in December, narrowing the second annual decline, as consumers built inventories ahead of a seasonal increase in demand. Stockpiles of copper, used in pipes and wires, have dropped 11 percent this year, paced by a 29 percent decline in Asia, according to the LME data. About 29 percent of LME copper stockpiles are awaiting delivery, the highest proportion since June 2005.

Goldman today ended its recommendation to buy copper for June 2012 after the metal rallied above its three-month forecast amid “little evidence” of tightening in the supply-demand balance. The bet was opened at $7,274 a metric on Dec. 19, for a profit of $1,161 a ton.

"The global economy lacks the demand ‘spark’ needed to generate significant upside to industrial metals prices in the near to medium term,” Michael J. Jansen, a London-based analyst at JPMorgan, said in the report dated yesterday. JPMorgan cut its 2012 aluminum estimate by 7.3 percent to $2,319 a ton and reduced its nickel price forecast 9.1 percent to $19,313 a ton.

Growth Forecast Cut

The World Bank this month cut its global growth forecast by the most in three years, saying that a recession in the euro region threatens to exacerbate a slowdown in emerging markets such as India and Mexico. The world economy will grow 2.5 percent this year as the euro area contracts 0.3 percent, and growth in China and the U.S. slows to 8.4 percent and 2.2 percent, respectively, according to the Washington-based institution.

Copper will average $8,594 in 2012, 1.8 percent less than previously forecast, as the market posts a 317,000 ton deficit before swinging into a surplus in 2013-15, Jansen wrote. Global refined copper consumption will grow 3.1 percent to 20.6 million tons this year, with Chinese demand advancing 6 percent after growth of 8 percent in 2011 and European usage contracting 1 percent, compared with 3.4 percent growth last year.

China’s Economy

China’s copper imports need to average 250,000 tons a month for the country’s demand to climb 5 percent this year as forecast, according to Goldman. China’s economy expanded at the slowest pace in 10 quarters as Europe’s debt crisis curbed export demand and the property market weakened.

Still, copper’s “downside” is limited on anticipation of further easing by China, the U.S. and Europe, and a price pullback should be viewed as a buying opportunity on a six- to 12-month view, according to Goldman.