The biggest drop in copper inventories in six years

The biggest drop in copper inventories in six years, is aggravating the scarcity prices head towards record highs, making the metal a first selection of Goldman Sachs Group Inc. and Morgan Stanley.

The demand will outpace supply by 367,500 tons next year, enough to cables, pipes and equipment at about 1.8 million U.S. households, according to the median forecast of 12 analysts surveyed by us. The stock may fall to a record low of using less than a week, said Michael Widmer, metals analyst at London-based Bank of America Merrill Lynch. Global exchange inventories fell by 22 percent this year, heading for the biggest drop since 2004.

Prices advanced 34 percent since 30 June, even as the International Monetary Fund forecasts slower growth in the world, the U.S. unemployment trapped near its highest level in more than a quarter century and China, which uses two of every five tons of copper, braking and increased loan interest rates. Now, banks Credit Suisse Group, Barclays Capital provides higher prices, with the median of a survey of a record average of $ 8,542 a tonne by 2011, 15 percent more than this year.

"Copper is the most attractive" base metals, said Ian Henderson, who manages about $ 8 billion in assets to JPMorgan Chase & Co. in London, including shares of Freeport-McMoRan Copper & Gold Inc. and BHP Billiton Ltd., the mining second and third largest. "I do not expect any decrease in demand for copper in 2011 and there is little in the way of new mines coming on stream."

Smart Phones

Prices rose by 18 percent this year, reaching $ 8,725 a ton on the London Metal Exchange today. That compares with an increase of 6.5 percent in the MSCI World Index of shares, a 6.9 percent return on Treasury bills and an increase of 16 percent of GSCI Standard & Poor's 24 future raw materials. Prices reached a record $ 8,966 a tonne on 11 November.

Demand for the metal, used in everything from smartphones to the brake pads will increase by 4.2 percent next year, compared with a gain of 2.6 percent in production, said Barclays Capital report of 11 November. Supplies fell 363,000 tonnes short of demand in the first eight months of this year, the Lisbon-based International Copper Study Group said in a report of 23 November.

Mining companies have failed to keep pace with demand because new reserves are increasingly difficult to find and the quality of the ore is low, which means less metal is extracted from each ton of earth. average scores dropped to about 1.1 percent this year from 1.6 percent in 1990, according to Guildford, England-based researcher Brook Hunt, a firm Wood Mackenzie.

Largest mine

Production at Escondida, the largest copper mine, will be reduced by up to 10 percent in the 12 months ended in June due to lower grades, Melbourne-based BHP Billiton, the largest shareholder, said in a statement on 25 August.

Freeport-McMoRan, the largest producer in the list, 21 October, said its copper sales in North America was reduced to 1.1 billion pounds this year from 1.2 million pounds in 2009. Indonesia sales likely to decline to 1.2 million pounds from 1400 million, the Phoenix-based company said.

"The most important copper reserves that are being produced today come from 100 year old mine, with few exceptions," said Freeport Chairman James R. Moffett in a conference call on November 17.

analysts forecast the shortage is not yet reflected in the futures markets. Copper for delivery in December 2011 traded at $ 8.555 on 3 December at the LME, down 1.9 percent from the benchmark contract for delivery in three months.

Goldman predicts that prices of $ 11,000 to buy the contract then and December 2011 is one of seven recommendations in commodities, according to a report by December 1.

Bailout

The earnings forecast could be prevented by slowing growth. Prices fell by 7.7 percent in three days last month on concern measures to control inflation China may curb demand for metals and that Ireland will need a bailout plan.

The prices now may be biased by who owns metal. An unidentified company held 50 percent to 79 percent of LME stocks for delivery from December 1, the data show bag. Buyers of that day paid the biggest bonus in two years for immediate delivery, in relation to the three-month contract. Total inventories 324 375 tonnes available, the exchange said Dec. 6.

Record prices could encourage users to substitute cheaper materials. Global consumption may be 100,000 tonnes less than expected in 2011, and 250,000 tonnes short of predictions in 2012, due to the substitution of plastics in aluminum alloys in the pipes and air-conditioning, Credit Suisse said on 20 October.

Hybrid cars

Substitution can take place on 3 percent of demand this year and next, according to London-based Rio Tinto Group. The new applications in electric and hybrid cars should offset some of that, Andrew Harding, chief executive of copper in Rio de Janeiro, said Nov. 26. The average North American car contains about 23 kilograms (51 pounds), while an electric car uses about 75 kilograms, he said.

The tripling in prices since December 2008 is also encouraging the use of scrap, alleviating shortages highlighted by the fall of this year from 22 percent in inventories monitored by exchanges in London, Shanghai and New York. The supply of metal wires and electronic products rose 25 percent in the first eight months, the International Copper Study Group reported in November.

The greatest threats to higher prices are China tighten its monetary policy and a worsening debt crisis in Europe, said Bank of America Merrill Lynch Widmer, whose March forecast the average price this year has a precision of 2 percent.

China Economy

China may raise bank reserve requirements to deal with capital inflows and a possible increase in credit at the beginning of 2011, Li Daokui, a central bank adviser, said on 3 December. The bank pushed the rate of one-year loans to 5.56 percent in October, the first increase since 2007.

However, manufacturing grew at a faster pace for the fourth consecutive month in November, according to the federation of logistics in the nation. China's economy will expand by 9 percent in 2011, compared to 10 percent this year, according to the median of 18 economists surveyed by us. Would still be more than three times the speed of the U.S., the second largest copper user, according to the survey.

Consumption in China, India, Brazil and the Middle East will expand at an average annual rate of 7 percent per capita by 2015, according to Barclays Capital.

"Where is all the copper is coming back?" Said Tom Patton, director general of Quaterra Resources Inc., a Vancouver-based company developing the mine in North America. "New sources have 10 to 15 years to implement."

Increased demand

Aurubis AG, the largest foundry in Europe, is also predicting increased demand next year.

"We now see a very positive order flow for the next year," said Bernd Drouva, executive director of the Hamburg-based company, e-mail. "Every dive in the price of copper is recognized by customers as an opportunity for new orders."

Demand from Asia helped Santiago-based Codelco, the largest producer, increased the surcharge on sales to China next year by 35 percent, more than the increase of 23 percent for Europe, industry officials, said last month. Buyers pay the fee above the LME price of copper for immediate delivery.

The gain is driving shares of mining companies. Freeport-McMoRan rose 36 percent on the New York Stock Exchange this year, outpacing the 9.8 percent gain in the S & P 500.

Demand can also be promoted if JP Morgan, BlackRock Inc. and Foundation Securities Ltd. products become publicly traded by metal backed. These funds could store up to 250,000 tons, Aurubis said in a report of 15 November. Similar products backed by gold accumulated 2,098 tonnes since it began in 2003, equivalent to nine years of U.S. mining production.

"The real story is metal and we called this the decade metals," said Mari Kooi, executive director of Wolf Asset Management LLC, told Hedge Fund Link Newsletter and investors in New York on 2 December. "What we have is an implementation of the scarcity of metals."