BMO: Copper Weakness Below $3/Lb 'Overdone'

Wednesday March 12, 2014 8:06 AM

BMO views copper’s decline below $3 a pound as “overdone” based on forecasts for a still-tight market this year. The bank says weakness was driven by Chinese events, including corporate bond defaults and weak trade data, exacerbated by growing negative market sentiment toward copper since early 2014. In addition, bonded warehouse inventories are estimated to have increased to 745,000 metric tons in recent weeks, and there is now speculation that the People’s Bank of China’s deliberate yuan depreciation is aimed at tackling metal financing, potentially releasing this copper to the market. However, BMO says it expects that any inventory that comes to market would be eventually absorbed by real demand, supporting copper prices on average through the year. “China's demand from the power, transport, and consumer goods sectors are expected to remain strong, particularly given the state grid's commitment to increase spending by 13% in 2014,” BMO says. Still, the bank does list a potential downside risk from China's construction sector, given recent reports that some property developers are struggling to obtain financing. A 10% year-on-year decline in copper demand from the construction sector this year would represent 450,000 tons of refined copper, with the market surplus then rising to 600,000, the bank says. BMO says it estimates that “average copper prices could find equilibrium around the $3.05-$3.15/lb level in this bearish scenario, but still above current price levels.”