A limited global supply of copper concentrate should keep the market in a production deficit in 2012, supporting prices above current levels even though Chinese demand growth is expected to moderate further this year.
This structural supply-side tightness should limit the downside for copper this year, keeping prices of the industrial metal relatively stable in a range of $8,300 to $8,800 per tonne in 2012, an industry report said on Tuesday.
Copper on Tuesday was trading at around $8,050 per tonne.
"The dominant supportive factor in recent years - limited supply, particularly at the concentrate stage, nevertheless remains in place," analysts said in a Thomson Reuters GFMS Copper Survey 2012.
Thomson Reuters GFMS estimate the global concentrate production was broadly unchanged last year at 15.953 million tonnes, extending a sustained period of limited growth in concentrate output.
This shortage in the raw material placed a constraint on refined output. GFMS estimated that refined copper production increased by 3 percent in 2011 to 19.562 million tonnes.
Despite growth in secondary supply - estimated at 18 percent of total supply in 2011 - it was not sufficient to fill the gap created by the relatively flat production of the primary sector.
London Metal Exchange (LME) benchmark copper futures rallied to a record high at $10,190 per tonne in February 2011.
Even at those record levels, producers did not ramp up production because existing mines were already producing at a high rate and copper producers were also dealing with a myriad of other problems such as low ore grades and labor strife.
"Many of these factors are likely to constrain any increase to copper supply in 2012," the Survey said, adding an increasing number of large-scale copper projects will have a much greater influence on the copper market from late 2013 rather than this year.
KEY TO DEMAND
Despite an unsupportive short-term consumption outlook due to Europe's debt crisis, the key to the demand side going forward lies with China and, to a lesser extent, with other emerging economies.
"The combination of our field research, together with some of the recent economic data, suggests that the Chinese consumption growth rate should continue to moderate over 2012," the Survey said.
Weaker demand from Europe will also serve to limit overall consumption growth. North America demand conditions were seen picking up, but not enough to offset more subdued conditions elsewhere.
The demand and macroeconomic environment will filter through to investment activity, which is expected to be broadly neutral over the remainder of the first half of this year, and more influential towards the end of 2012.
Copper's positive fundamental backdrop of a tighter structural supply base and low inventories should limit a downside move in price, while demand is unlikely to support significant gains from levels seen at the end of the first quarter of 2012, at around $8,400 per tonne.
"As a result, when assessed on a quarterly average basis, the LME cash quote should be relatively stable and Thomson Reuters GFMS project a range of $8,300-$8,800/tonne during 2012."
Source: Reuters