Commodities | Nov 20 2006
By Greg Peel
It was copper carnage last week as a continuing trashing of the copper price in London and New York saw 4% wiped off diversified BHP Billiton (BHP), 6% off diversified Rio Tinto (RIO), and 20% off pure-play Aditya Birla (ABY).
Copper inventories have increased 70% since the start of the year, causing the market to become panicky about the end of burgeoning demand, the end of the commodities boom, the end of the world as we know it etc. However UBS analysts want to put things into perspective.
Firstly, the increase in inventories means there is now three weeks worth of consumption in warehouses, up from two at the end of last year. Hardly a glut, particularly when you consider cycle high stocks historically run out to 9-12 weeks. This represents 152kt of metal at the LME, compared to the 20 year average of 325kt.
Secondly, UBS global analysis suggests the “apparent” weakness of Chinese consumption – the real panic factor – is due to destocking only and is not a genuine demand reduction. Destocking has meant a fall in imports.
UBS remains convinced the commodities boom will continue and that Chinese demand will be strong for some time yet. Any weakness in US demand will be offset by Europe and Japan, the analysts believe. A good indication in copper market strength is the recent abandonment of price participation in the negotiation of TC/RC charges, which has put copper producers on the front foot. (See “Copper Producers Turn The Screws”, 13/11/06).
