Copper, this year’s best industrial- metal investment, may become the worst in the second quarter as demand slumps the most in three decades.
Known as the commodity with an economics Ph.D., copper risks losing its reputation as an industrial barometer because prices rose 40 percent, the best start to a year since at least 1986, just as the global economy contracted for the first time since World War II, according to data compiled by Bloomberg. Prices rose as China, the world’s largest user, agreed to stockpile as much as 400,000 metric tons, based on Macquarie Group Ltd. estimates, enough to fill 18 Olympic swimming pools.
Copper will average $3,400 a ton this quarter, 21 percent below the April 3 closing price of $4,301 on the London Metal Exchange, according to the median estimate of 13 analysts surveyed by Bloomberg. U.S. manufacturing contracted for 14 consecutive months, Japan’s Tankan survey of business sentiment fell to the lowest on record and euro-region unemployment rose to the highest level in almost three years.
“We’re running out of impetus here,” said Sean Corrigan, who helps manage about $5 billion in commodities at Diapason Commodities Management SA in Lausanne, Switzerland. “We’re not building houses anywhere in the world, car sales are down by 50 to 60 percent in the major economies and commercial real estate is running into problems.”
Consumption will shrink 9.2 percent in 2009, the biggest drop since 1975, according to Sydney-based Macquarie. New autos in the U.S. sold at an annual rate of 9.86 million units in March, compared with an average of 16.8 million this decade through 2007, according to Autodata Corp. of Woodcliff Lake, New Jersey. The average car contains 2 kilometers (1.2 miles) of copper and alloy cables.
U.S. Homebuilders
Confidence among U.S. homebuilders in March stayed near a record low, the National Association of Home Builders/Wells Fargo index showed. Developers use about 400 pounds of copper pipes, wire and related goods in a typical American house.
“Copper is very expensive, relative to the collapse in industrial demand,” said Lars Steffensen, managing director at Southend-on-Sea, England-based hedge fund Ebullio Capital Management LLP. Copper should fall to $2,500 a ton because there’s no shortage, said Steffensen, whose $13 million fund has risen 31 percent since opening to outside investors in August.
Global copper stockpiles tripled to about 567,000 tons since July, according to combined figures reported by the London Metal Exchange, New York Mercantile Exchange and the Shanghai Futures Exchange. That’s equal to more than 12 days of global demand.
Commodity Futures
Hedge-fund managers and other large speculators increased their net-short position in New York copper futures by 0.6 percent in the week ended March 31, according to U.S. Commodity Futures Trading Commission data. Speculative short positions, or bets prices will fall, outnumber long positions by 18,525 contracts. The average since copper peaked in May has been a net short position of about 12,000 contracts.
Prices rose partly because of China’s purchases for stockpiles, said Stephen Briggs, an analyst at RBS Global Banking & Markets in London.
The Beijing-based State Reserve Bureau took advantage of the 54 percent price decline in 2008 to agree to buy 300,000 to 400,000 tons of copper, according to Macquarie, which forecasts a surplus of 936,000 tons in 2009. A decline in manufacturing contributed to a slump in inventories of scrap, the Brussels- based European Metal Trade and Recycling Federation said.
Reducing Purchases
Copper’s 51 percent increase since Dec. 24, when prices reached a four-year low, probably means China is reducing purchases, said Briggs. “I am pretty confident that the SRB is not buying at $4,000,” he said.
Morgan Stanley says copper is the industrial metal most likely to drop in the second half of 2009. Buying by China may have ended, demand is sagging and producers haven’t been aggressive enough in shutting mines, New York-based Hussein Allidina and three of his colleagues said in an April 2 report.
The forecast for a 21 percent drop in copper compares with declines of 14 percent for zinc and 9 percent for lead, and gains of 8 percent for tin and 30 percent for uranium, according to analyst estimates compiled by Bloomberg.
Some producers are more optimistic. Charlie Sartain, chief executive officer of Xstrata Copper, a unit of the world’s fourth-largest producer, said last week the Zug, Switzerland- based group may buy other mining companies to help double output and prepare for a rebound in demand.
U.S. Demand
Jose Pablo Arellano, CEO of Santiago, Chile-based Codelco, the world’s biggest copper miner, said on March 31 that U.S. demand may have bottomed. Chilean Mining Minister Santiago Gonzalez said last week that December’s lows are “in the past” as Chinese demand rebounds. Chile is the largest copper- producing nation.
Freeport-McMoRan Copper & Gold Inc.’s Richard Adkerson, chief executive officer of the world’s largest publicly traded copper producer, said April 2 it’s too early to reverse cuts made in 2008. The New Orleans-based company is expected to report first-quarter net income of $36 million, compared with $1.19 billion a year earlier, according to the median of six analyst estimates compiled by Bloomberg.
The 82-member Bloomberg World Mining Index, led by Melbourne-based BHP Billiton Ltd., plunged 56 percent in the last 12 months.
Housing Market
Even a turnaround in the housing market may not be enough to stir demand. The number of unsold homes in the U.S. at the end of February equaled 9.7 months of sales, based on current transaction rates, according to the National Association of Realtors. Home prices in 20 U.S. cities plummeted 19 percent in January from a year earlier, the fastest drop on record, the S&P/Case-Shiller home-price index shows.
The number of Americans signing contracts to buy previously owned homes rose 2.1 percent in February, the National Association of Realtors said April 1.
“The last two weeks have shown improvement but I still think that we have an economy that has some issues,” Joel Rassman, chief financial officer at Horsham, Pennsylvania-based Toll Brothers Inc., the largest U.S. builder of luxury homes, said April 1 in an interview with Bloomberg Television.
The prospects of trillions of dollars of government spending on roads, bridges and public works projects to revive growth bolstered commodities in the first quarter.
Developing Markets
“Money poured into copper and the industrial commodities on the assumption that growth in the developing markets would come back sooner rather than later,” said Peter Sorrentino, who helps manage $13.3 billion at Huntington Asset Advisors in Cincinnati. “That has gotten a little overdone. The stimulus packages aren’t going to have a real impact until 2010.”
U.S. gross domestic product is expected to shrink 2.5 percent in 2009 and expand 1.8 percent in 2010, according to a Bloomberg survey of economists. The eurozone economy will contract 2.9 percent this year and expand 0.5 percent in 2010.
World industrial production will drop 7.4 percent in 2009, paced by an 18 percent decline in Japan, almost 13 percent in Europe and 10 percent in the U.S., according to Macquarie. It will expand 2.9 percent in 2010, the bank predicts.
“We think we could see a pretty significant selloff in the next quarter,” Sorrentino said. “Until we see demand start to turn around and stockpiles disappear, the prices will remain under pressure.”
