Although copper bulls say the copper price will reach $10,000/t and higher on the back of China's economic growth, the Virtual Metals Research Group says this is unlikely. They expect the copper price to soften after 2010 as slower growth in China and lower US demand coincides.
The Fortis/VM Asian Metals Monthly report says expectations that China will continue importing ever-larger volumes of refined copper imports will be disappointed as economic growth in the country slows.
China's political leadership is struggling to steer the country between burgeoning inflation and the disappointing economic expectations of rising consumer wealth and Chinese officials have warned that their economic policy will be guided by gradually tightened credit expansion.
The market expects further increases in reserve requirements, more increases to benchmark interest rates and a continued policy of rationing credit in commercial lending that will eventually turn the juggernaut into the slower lane, said the report.
One result of this will be that China seeks out much larger supplies of copper concentrate to feed its own developing copper smelter sector instead of importing refined copper.
This will support copper prices at higher levels than before the start of the copper bull-run in 2006, but may not lift prices to the level of $10,000/t and beyond, the report said.
China's refined copper and copper product imports are already slowing as the country imported over 17% less unwrought copper in the first four months of 2008 compared to the same period last year. Chinese copper users are instead buying more foreign copper scrap; scrap imports were about 19% higher year-on-year at more than 1.9mt.
The slowdown in China's refined copper and copper products imports can partly be attributed to the negative arbitrage between the LME and Shanghai Futures Exchange (SHFE) copper prices, which have seen the former recently trading more than $800/t higher.
It may also partly reflect the shift in China's copper trade on the back of capacity growth of China's own copper smelting sector. China bought almost 1.37mt more copper concentrate in first quarter 2008 - more than 32% higher compared to the same period in 2007.
The report said the trend of higher copper concentrate imports will support copper prices to some extent, but it signifies a long-term shift away from China being so dependent on imported refined copper and copper products that will help keep international copper prices from soaring.
However, in the short term, the implication of the drop in China's refined and copper products imports is limited.
Less support from supply
The overall copper supply trend appears to be much less supportive of the copper price than it was in the past couple of years. The International Copper Study Group (ICSG) expects a surplus of 85,000t in 2008, reversing last year's deficit of 37,000t, and more importantly, seeing the surplus rising to 429,000t in 2009.
This is a relatively thin layer of comfort in a global market where demand for copper is currently about 18mt annually and supply problems occur frequently and unexpectedly.
However, the high price is leading to a variety of new mines and expansions - about 3.5mt of additional copper will come into the global market between now and the end of 2010 through expansions of already existing mines or the re-starting of mines mothballed years ago.
The report said there have been factors that have kept the price higher than it might have been, such as the collapse of the US dollar. However, with the dollar appearing to strengthen again, this particular support for the copper price is appearing less reliable than recently.
Exchange stocks have also been very low this year compared to previous periods, but seem to be on the rise once more.
Copper stocks on the SHFE rose 10% in the week of 5-9 May to more than 51, 000t and saw the same percentage rise in LME warehouse stocks to above 121,000t.
These are still low levels, but the direction of the trend is important, said the report.
If it consolidates in the coming weeks and months as it may do if the macroeconomic outlooks in the US and China coincide to cause slower growth generally, then the price will soften yet further.
The US still important
Chinese copper consumption at 4.5mt annually is now twice that of the US, but the US has changed from a direct to a surrogate consumer of copper through higher imports of manufactured goods produced more cheaply in China and elsewhere.
This form of consumption must be substantial and will be affected by the current consumer belt-tightening in the US.
In addition, US direct copper imports have also fallen and were down almost 29% in the first two months of 2008 compared to the same period last year, at slightly more than 116,000t.
While China's copper consumption growth rate is not expected to collapse soon, its refined copper imports may diminish faster than imagined as it becomes a bigger producer in its own right.
China has also embarked on a global hunt to secure supplies of all commodities it considers to be of strategic importance for its future development. The China of tomorrow could directly source its commodity needs rather than relying on international markets and the vagaries of fluctuating prices, said the report.
The VM Group said for the time being it believed copper prices would go into a period of weakness - at least until the bigger picture becomes more clear.
Reasonable expectations must be that China's rate of economic growth will slow in the remaining years of the current decade, and once the Beijing Olympics is out of the way we may see signs of firmer action to ease some air out of the bubble.
This will have its repercussions on China's consumption of all base metals, not least copper.