Copper prices to fall but not collapse

Copper prices could trade lower next year amid an uncertain outlook for the world’s major economies, but the move is more likely to be a grind than a collapse as supplies remain tight, according to the consensus among metals traders and mining executives.

The discussion at London Metal Exchange week, the largest gathering of the metals industry, has been dominated by a trio of uncertainties in the world’s three most important economies that are weighing on business confidence: the handover of power in China, the US election and looming “fiscal cliff”, and the eurozone debt crisis.

“Everyone is sitting on the sidelines waiting for the US election and the appointment of the new Chinese leadership,” Andrew Michelmore, chief executive of MMG, the international mining arm of Minmetals of China, told the Financial Times in a video interview.

Thomas Keller, chief executive of Codelco, the world’s largest copper miner, added that the uncertainties could cause some volatility in the copper price – a miners’ euphemism for falling prices. “But other than strong volatility we are not forecasting any sharp decline in the copper price,” he said.

The copper price, widely seen as a bellwether for the global economy, has averaged just under $8,000 a tonne so far this year – down from recent records but still high by historical standards.

Most traders expect average prices next year to be slightly lower as the uncertain growth outlook combines with a rise in mine output. Traders predicted average prices of $7,000-$8,000 a tonne, but said copper would continue to outperform other metals. On Wednesday, copper was trading at $8,146.

Mark Hansen, head of metals at Noble Group, predicted average copper prices of $7,200 a tonne next year, saying: “There’s no question that copper supply is on the way up.”

But even though production is on the rise, inventories remain low and many traders and executives expect the mining industry to once again fall short of its promised production.

“We can see more volatility in the short term, say until the end of the year,” said Diego Hernández, chief executive of Antofagasta. “But copper supply and demand is quite tight.”

A senior copper trader added: “I think people are going to be surprised on the upside.”

Deals between miners and consumers for next year’s supplies – a good barometer of sentiment – also reflect the cautious mood. Codelco and Aurubis, Europe’s largest copper smelter, are offering customers in Europe slightly lower premiums for next year’s supplies than they agreed this year, an indication of weaker sentiment. However, traders said European buyers had increased their orders modestly.

At the same time, smelters are expecting to be able to charge more to convert copper ore into metal – a further indication of more plentiful supplies.