Can Copper Recover?

March 16, 2011

 

Quake's Long-Term Impact On Japanese Demand

As cleanup and recovery crews continue to struggle amid aftershocks and nuclear emergencies to rescue survivors from the 9.0 magnitude Sendai earthquake, the quake's aftermath is also being felt elsewhere: in the markets.

In the short term, domestic demand for copper—as well as other base metals—will drop, as Japan's manufacturing plants remain closed due to quake damage as well as power supply disruptions.

Global copper product supply could also be affected. Japan is the No. 2 buyer of copper ore after China, and its smelters supply finished product to manufacturers around the world. The third-largest copper producer, Mitsubishi Materials Corp, has halted production in its Fukushima prefecture smelter. Given the continuing state of emergency, saving lives takes precedence and there's no way to tell when these operations will resume. But as the response switches from rescue to cleanup and then on to reconstruction, domestic demand for copper and other base metals should rebound as the smelters will come back online.

In the past, Japan has typically consumed around 5 percent of the world's copper—but that percentage will certainly increase over the next few years, as reconstruction begins and the country's infrastructure and housing are rebuilt.

 

Tight Supply

Which brings us back to supply. Analysts already predicted 2011 would see tight copper supply. Adrian Day, president of Adrian Day Asset Management, told HAI, "There is no new supply this year, but [there is] potential for supply disruptions from aging mines."

Meanwhile, Chief Executive of Codelco Diego Hernandez said the supply-demand balance would likely continue into 2012 and that prices were already higher than expected.

Between tight supply and the possibility of increased demand from Japan stemming from recovery efforts, copper may be able to rebound from its current doldrums in the coming months.

 

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