GFMS launched its annual Copper Survey this week, which estimates that the copper market was in surplus of 777,000 t in 2009, as falling consumption in the majority of key markets more than offset the growth noted in China and production continued to increase, albeit at the margin. The consultancy said the main driver was strong investment demand for the red metal throughout the year. It noted global mine production increased by 2.4% in 2009, to reach 15.8 Mt, with rises in Africa and Asia, amounting to 14% and 15% year-on-year respectively. North American declines were partly offset by growth in Chilean production, culminating in output in the Americas overall falling by 1.9%.

As Neil Buxton, Managing Director of the Base Metals division of the consultancy noted, “despite this outcome, prices climbed 141% from their annual low in January of a little more than $3,000/t to an end-year peak of $7,346/t, before rising further in the new year, peaking recently above $7,800/t”.

Support was also provided by official stockpiling in China, an increase in work-in-progress inventories in the same country as well as modest improvements in supply-demand conditions as the year progressed, especially compared to their dire state in the first few months of 2009.

GFMS: “although copper’s supply/demand fundamentals were negative for the price in 2009 and remain uninspiring this year-to-date, the outlook for them in the longer-term is positive for prices. Given projections of a persistently tight concentrate market, it is difficult to see how production will be able to keep up with the consumption recovery expected going forward. Realisation of this has undoubtedly been a principal factor driving investors to the red metal and can in large part explain why copper has outperformed the majority of other commodities.”

One issue the Copper Survey addresses is the short to medium-term outlook for copper prices. “The key question here”, Buxton argued, “is whether the momentum provided by investment demand will be maintained through to a time when an improvement in supply-demand conditions can take over the reins. Developments so far this year suggest that the answer is yes.” The limited extent of the recent correction and the fact that speculators and consumers found prices well above $6,000/t low enough to rush back into copper is supportive of this view.

At the same time, GFMS acknowledges the price currently stands at levels already elevated and that in the upper-$7,000s it is difficult to see a new wave of money moving into the market, at least until the time when supply-shortages emerge. Elsewhere, it says, “yield-hungry speculators are likely to actively trade copper-related news, macro developments and movements in other asset classes and this will likely maintain considerable volatility in the price.”

To conclude, GFMS expects that the above forces will most probably see copper prices go through a period of consolidation over the next few months and breaches through the February low and the end-March high are expected to be limited and short-lived. As the market moves into deficit towards the end of 2010, strong investment demand is likely to re-emerge. This will probably lead to more noteworthy advances and GFMS would expect copper prices to exceed $8,000/t before the end of the year.

Highlights of the report include:

• Estimated global average cash costs (C1) declined by 5.9% in 2009 to reach 99.5 ¢/lb, equivalent to $2,194/t. The decline was fuelled by weaker producing country currencies, lower input prices and higher gold by-product credits
• Global refined production rose by 0.9% last year to reach 18.4 Mt. A tight concentrate market compounded with lower scrap availability, in the aftermath of the collapse in copper consumption in the second half of 2008 and over much of last year, limited growth
• In spite of dire conditions in most key markets, global consumption posted a limited decline of 1.7% last year, to reach 17.6 Mt overall. The relatively benign outcome was almost exclusively due to China’s 26% year-on-year growth, fuelled by an aggressive fiscal stimulus and loose monetary policy in the country. In contrast, demand in the majority of mature economies posted double digit declines.