By Isabella Zhong
Already battered commodities prices suffered yet another blow as
the U.S. dollar soared to its highest level in more than a decade
on Friday.
Among the casualties was copper, the ubiquitous base metal that
could be found inside electric wires and on circuit boards. As the
Wall Street Journal Dollar Index gauged the greenback at its
strongest level since 2003 against a basket of 16 other currencies,
spot copper prices retreated to $6,309 a tonne, just $3 shy of an
almost five year low struck last month. Because copper is
denominated in U.S. dollars, a stronger greenback weighs on demand
as the commodity becomes more expensive for buyers using other
currencies.
However, the appreciating dollar hasn't been the only antagonist
for the red metal. With China accounting for almost half of global
copper consumption, investors are very focused on economic growth,
as well as car and electric tool production, in the world's most
populous nation. So news of China's manufacturing activity having
plumbed 18 month lows, and just skirting outright contraction, in
December only served to further dampen downbeat sentiment towards
the metal.
Compounding copper's woes is the expectation that there will be
a surplus of copper this year as weaker demand meets growing
supply. Given the interplay between supply and demand, it appears
copper's tough days could linger for a while. Credit Suisse expects
spot prices for the commodity to remain fairly flat over coming
years. The broker forecasts an average price of $6,800 a tonne this
year, $6,625 a tonne in 2016 and $6,600 a tonne in 2017. A surplus
of 100,000 tonnes is expected this year, while oversupply in both
refined copper and copper concentrate will worsen in the following
two years amid mine starts and expansions. Meanwhile, the near term
economic outlook for China and Europe, which accounts for two
thirds of global copper demand, appears glum.
The International Copper Study Group, a forum for copper
producers and consumers, also expects a surplus of the red metal in
2015, with supply expected to outpace demand for the first time in
five years. The ICSG forecast a 2015 surplus of 390,000 tonnes in
October, but this was a substantial downward revision from the
forecast of a 600,000 tonnes surplus unveiled in April last
year.
However, beyond the next three years, a rebound may be in store
for copper prices. Australian mining giant BHP Billiton (BHP.AU),
one of the world's largest producers of the red metal, points out
that declining copper grades at mines will help produce a deficit
in supply beyond 2018. Falling copper grades mean supply will
decrease if miners are unable to increase the amount of copper ore
they process. BHP and Rio Tinto are considering additional
investments in processing technology to help offset declining
grades at Chile's Escondida mine, the world's largest copper
mine.
Despite the downbeat views on copper prices by observers outside
the mining industry, many of the world's largest miners are pushing
ahead with new copper projects. BHP Billiton and Rio Tinto (RIO.AU)
received U.S. government approval in December for a land swap deal
that will pave the way for the $6 billion development of the
Resolution copper project in Arizona. Resolution is the world's
third largest undeveloped copper deposit. BHP is also considering
an expansion of its Olympic Dam mine in the state of South
Australia, which if approved could see the mine emerge as the
world's second largest copper mine.
While lower copper prices may squeeze the profits of copper
producers like BHP Billiton and Rio Tinto, it's not bad news for
everyone. India, the world's second most populous nation, could
stand to benefit. The country could grow to become the world's
third largest copper consumer by 2020, overtaking Japan and Germany
in coming years, according to the Indian Copper Development Centre.
The need to build new electricity networks and railway tracks as
the country moves up the economic development scales would be a key
source of that demand.
India's automakers could also be beneficiaries of lower copper
prices. An average passenger car contains anywhere between 20
kilograms and 50 kilograms of the red metal, according to ABN AMRO
Bank. That means low copper prices would be a positive for the
sector's production costs.
Tata Motors (500570.IN) was the subject of a bullish stock pick
by my colleague Tom Streater late last year. Despite its excellent
growth prospects from luxury brands under the Jaguar Land Rover
umbrella in coming years, the company trades at a discount to
peers.
Currently at around INR510 a share, Tata Motors fetches 7.7
times projected earnings, which compares to an average of 16 times
for Indian car makers. Although Tata Motor's share price has
slipped slightly since late last year, the upbeat outlook for the
stock remains intact. The company's return on equity of 27% is
higher than the 25% industry average, while its earnings are
expected to grow at 16% versus 14% for peers.
Meanwhile, Barclays analyst Sahil Kedia noted platform
consolidation is also delivering cost efficiencies on the shop
floor for the company. Kedia, who has an overweight rating on the
stock, sees 20% upside for Tata Motors.
Comments? E-mail us at asiaeditors@barrons.com
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