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Copper: Range-bound in the near-term

Krishnan Thiagarajan

AT the current price levels of $1,773, the prices of copper at the London Metal Exchange have remained locked in a narrow range of $1,700-1,850 in the first two quarters of 2000. After staging a sharp recovery from the 11-year low of $1,350 touched in March 1999, the copper prices have stagnated in this band. Even the three-month forwards at $1,790 and 15-month forwards at $1,773 indicate that the current sideways price movement may continue in the near-term.

Unlike the bullish trends which were forecast for the copper metal in the early part of 2000, the actual price movements have turned out to be a let down. The forecast for 2000 were dictated by strong demand from the US in an election year and a positive boost in demand from Europe and Asia. As the actual events have borne out, the fairly sizable warehouse stocks and the large imports by the US towards the end of 1999 have ensured that the tightening of supply did not materialise. Most producers in Asia have also entered into annual contracts which has also kept the supply levels fairly high. As always, China continues to be a wild card in the overall price movements. If the imports from China surge over the next quarter, the price trends may stage a d ramatic improvement, but in the absence of that factor, it appears that copper prices are likely to remain range-bound over the next couple of quarters.

Part of the slowdown in international copper prices is also attributable to the process of consolidation which started in the third quarter of 1999, but failed to lend precise direction to the copper price movements. Following a breakdown in the unsolici ted combination of Phelps Dodge, the second largest producer of copper with Asarco and Cyprus Amax, the price rise lost steam by the first quarter of 2000. With Phelps Dodge managing to acquire only Cyprus Amax and Asarco being acquired by Grupo Mexico, the raison d'etre for consolidation stands diluted to a large extent.

On the domestic front, the hardening price trends on the LME had contributed to substantial price hikes in the first quarter of 2000. After the depressed price trends witnessed during a large part of 1999, the price revisions effected by domestic produce rs such as Sterlite Industries and Birla Copper in early 1999 provided the much-needed relief to their bottomline. Considering the comfortable price differential which prevailed between the landed cost and domestic prices, the price revisions were made w ithout much of resistance in the markets. But if the international prices of copper remain range-bound, scope for further price hikes may be limited.