Simon Hunt Strategic Services — the eponymous market analysis vehicle of copper market veteran Simon Hunt — has just published its 2012 outlook.
Be warned, though, it carries the following disclaimer:
The views set out in this report will be deemed heretical by many but they are based not just on understanding the industry’s history of the last 50-odd years or its cyclical nature (good times never go on forever much as we would like them to!), but on an analysis of material which has actually gone into furnaces and that held within the financial sector and others…
Naturally, FT Alphaville always likes a contrarian view, especially when it’s one based market fundamentals like stuff that’s “actually gone into furnances”.
So here, for the benefit of all, is a summary of Simon Hunt’s top heretical views (our emphasis).
* The world is in a balance sheet depression which will make a second and perhaps more dangerous credit crisis almost inevitable. It should break out next year or in 2013.
*The three pillars of the world economy, the USA, Europe and China, each have their own problems, but their impact is global because of the feedback loops from the financial sector to the economy.
*The USA has a debt and deficit profile which is unsustainable. The Euro Zone has yet to fully decide whether it can forge a full fiscal union or whether the costs are too high in which event membership will have to be restructured. And China is trying to put its economy onto a more sustainable growth path at a time of leadership change.
*Debt and demographics will shape future global growth. Governments have made promises to their citizens which they now cannot afford and even less in the future as retirees in so many countries are mounting. Markets have become frustrated by political indecision. They want answers.
*Since the power of markets is infinitely greater than the resources of central banks, they will get their way.
*The world will suffer from rolling recessions starting in 2013, continuing until about 2018 and characterised by deflation. Most asset prices will fall during this period.
* By 2018/20 the process of deleveraging will have run its course. The process of creative destruction will be transforming many industries as new technologies replace many traditional industries and sectors.
*The world beyond 2020 will be a different place. Gone will be the volatility of recent years; gone will be the wanton policies of certain central banks; gone will be the consumption binge of recent decades; and gone will be the power and influence of banks. It will be also be the engineers and scientists who make things who will replace the bankers as guardians of the universe. Monetary policy will hark back to old times with money supply rising parri passu with world GDP.
*This means that asset inflation will be largely non-existent because funds will experience solid long-term growth opportunities in equities.
*World industrial production should grow by an average of just 0.4% a year from 2011 to 2019; by 3% a year from 2020 to 2029; and by 2.8% a year from 2030 to 2035. These growth rates compare with those experienced from 1990 to 2010 of 3.3% a year.
How that relates to copper:
*Two mega developments will impact world copper consumption: the level of global business activity and substitution.
* High and volatile copper prices, due to the increasing involvement of the financial sector, has forced multinational companies, such as utilities, auto and appliance companies together with their fabricator friends, to limit the amount of copper used in their systems through better designs and tighter specifications and/or to design copper out of their systems through using other materials or by new technology.
*Some 2.5 million tonnes of global copper has been lost from 2006 to 2010 by substitution in its fullest sense and probably a further 3.4 million tonnes by 2015. Strategic decisions have been taken to either design copper out of products or to introduce a new round of re-designing and tightening specifications.
*It is in the period, 2015 to 2020 that the wire and cable sector will begin to feel the negative impact of High Temperature Super Conductors (HTS); it is in this period that they will be introduced commercially in some key countries. In fact, they are now quietly and slowly being introduced into China‟s grid system.
*Based on 2010 data our current forecast is that around 7.5 million tonnes of copper will be lost from 2011 to 2030 of which around 80% will be within the wire and cable sector, largely because of the impact of HTS and towards 2030 of carbon nanotubes.
*In fact, the world of nanotechnology is very likely to transform the design and material content of much of what we use today, including many of the appliances which contain copper. Its global market has risen from an estimated $9.4bn in 2005 to about $25.2bn this year and a forecast $750bn by 2015.
*China’s consumption growth will slow sharply in line with its economy. Based on the country’s demographics and rising productivity, its trend growth for GDP should slow to 5% a year from 2015 to 2020 and from there to 2030 to only 3% a year. Copper will grow at a slower pace.
* World refined copper consumption’s growth rates are set out below, implying that global consumption will increase from 17.9MT this year (after stripping out purchases by the financial sector) to 23MT in 2035.
And what’s the most significant copper industry trend which will have to be unwound?
In Hunt’s (key heretical) opinion it’s the increasing involvement of the financial sector in the market — both by purchasing physical copper and by its involvement in the futures markets — all of which is detaching prices from real-world fundamentals.
The following chart sums up the recent discrepancy perfectly:
As he notes:
This is an argument often refuted by producers but the evidence that it has occurred is overwhelming. For instance, how can the industry lose 2.5 million tonnes to substitution since 2005 and still have prices that have nothing to do with what fabricators and end users see in their underlying business. It is because the activities of financial players mask what is really happening to business.
Thus, it is the divergence between “demand”, a phrase now only used by producers and their analytical friends, and “consumption”, the latter representing material that goes into furnaces, which is the real issue. In fact, had actual consumption been as strong as the “demand” data, then spot premiums would have been consistently and significantly higher than producer premiums. Other than for short periods, largely for technical reasons, this has not been the case. Moreover, again other than for brief periods, fabricators have had no problems in obtaining cathode.
Conclusion: copper prices will fall sharply, and that, says Hunt, is almost a given.
Not convinced? Do check out the full report in the Long Room.
China’s copper as collateral addiction – FT Alphaville
Oxymoronic LME stocks – FT Alphaville
Let’s count the copper with dust on it – FT Alphaville
The curious case of un-cancelled warrants – FT Alphaville