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com October 23, 2012


Sunit Mehta Research Analyst (Base Metals) Kunal Shah Commodity Research Head

Copper prices have been in an uptrend since the start of the year 2012. Prices once again managed to cross $8000 per tonne on the London Metal Exchange (LME). On an absolute basis, LME Copper prices ending September 2012 were about 9 percent higher when compared to prices ending December 2011. Copper prices defied odds as despite of the constant pinning of the debt problems from the Euro Zone and Slowing Chinese Economy, Copper prices bounced back to trade around $8400 per tonne recently.

Source: Reuters, NB Research.

The additional quantitative easing program (QE3) so announced by the Federal Reserve is one of the major cause of price rise. On 13 September 2012, the Federal Reserve decided to launch a new $40 billion a month, open-ended, bond purchasing program of agency mortgage-backed securities and also to continue extremely low rates policy until at least mid-2015. This resulted into across the board buying in commodities and hence, copper prices tested its multi-month highs after the announcement.

Copper: Poised for a Correction | 1 October 23, 2012


Chinese Copper Demand China being the highest consumer of base metals, its trade with copper remains vital in understanding the ground-level demand and supply.

Chinese Refined copper imports have been in a downtrend since the start of 2012. Though imports in the first 8 months of 2012 were 57 percent higher than 2011, the trend is declining since
Source: Reuters, NB Research.

the start of the year. China recorded highest imports of refined copper in the month of December 2011.

Refined copper output in China has been very strong for quite a while now. The recent data of refined copper output reveals production near record highs in China. The total output of refined copper in china stood about 6.5 percent higher in the first nine months of 2012 when compared to the output in the first nine months of 2011.
Source: Reuters, NB Research.

Copper Inventory held at major Shanghai Futures Exchange has been growing in the second half of 2012. Copper stocks at Shanghai warehouses have increased by about 51.14 percent since mid-June 2012.

Slowing refined copper imports with rising refined copper output and increasing warehouse stocks is not a very good indication for physical demand of the red metal in China.
Source: Reuters, NB Research.

Copper: Poised for a Correction | 2 October 23, 2012


China Copper Physical Premiums Squeeze As fast as prices on the LME have surged because of the Fed announcement of further quantitative easing, domestic China copper demand has dropped from an already low level. September is usually peak copper buying season for China's fabricators, but activity has been slow so far this month due to concerns about fourth-quarter demand for China-made products in European markets and continuing strain in China's manufacturing sector. Premiums are a key indicator of supply and demand in physical metals markets, usually premiums rise in times of strong demand and tight supply and fall when stocks rise or demand weakens. In the recent development in physical markets, Copper premiums to LME prices have recorded as low as $40/ton in Shanghai compared with $70 in late August. This squeeze in premiums indicates that at current price levels the physical off-take of the red metal is slow and the supply has outpaced the demand in Chinese markets.

Global Economic Conditions

Source: Reuters, NB Research.

Source: Reuters, NB Research.

Source: Reuters, NB Research.

Source: Reuters, NB Research.

Copper: Poised for a Correction | 3 October 23, 2012


Data points from major Copper consuming nations show hints of improvement in September. However, the readings do not encourage much. Chinese GDP expanded at 7.4 percent its slowest pace since 2009. GDP growth in Euro Zone is still not showing much improvement, as looming economic crisis is likely to shave off more percentage from the Euro Zone GDP. The economic reports from the US indicate that there recovery process is gathering momentum. Positive Unemployment rate, Housing Data and ISM PMI suggests that the efforts of Federal Reserve are about to repay. However, it will be too premature to say that U.S. is out of woods as fiscal cliff still poses big threat to the nation. And the outcome of the presidential election is likely to view on the economy. Industrial Production activities in China, US and the Euro Zone are still well below the desired levels. Manufacturing PMI in China is still showing that there is a contraction in the manufacturing activities in the nations. The retail sales growth rate in US and Euro zone are almost close to zero levels. The housing market in China is still not out of the woods. There has been no relaxation in norms from the Chinese officials which they had levied to control the property bubble in China. On the contrary, Local governments in several major Chinese cities are getting tough on the property markets under increasing pressures from higher house prices. This phenomenon in still discouraging many investors who seek for investment in the Chinese housing sector. But, the US housing sector has shown signs of steady improvement in 2012.

Copper Global Demand-Supply Global Copper Supply Demand Balance (Million Tonnes) Mine Production (Concentrates) Scrap/Re-smelted blister Smelter Capacity Smelter Production Mine Production (Electro won) High Grade Scrap Mine Production (Total) Refined Production: Primary + Secondary (Total) - A % Change Consumption/Demand - B % Change Surplus/Deficit (A-B)
Source: WBMS, ICSG, NB Research

2010 12.87 2.20 17.57 15.12 3.35 0.52 16.22 18.99 3.60% 19.22 10.90% -0.224

2011 12.81 2.74 18.05 15.57 3.47 0.58 16.28 19.62 3.30% 19.78 2.90% -0.153

2012e 13.19 2.72 18.96 15.92 3.61 0.68 16.79 20.23 3.10% 20.23 2.22% 0.000

2013e 14.41 2.02 19.79 16.42 3.83 0.76 18.24 21.01 3.80% 20.99 3.50% 0.024

The demand-supply situation of copper remains tight though the magnitude of the deficit seems to ease in coming months. We expect the supply growth rate to outpace that of consumption. We expect global refined copper production to reach 20.23 million tones with an annual growth of 3.10 percent. And similarly we expect the consumption to be at the same level with an annual growth of 2.22 percent. Copper: Poised for a Correction | 4 October 23, 2012


The major driving factor behind the slowing consumption rate is because we have factored the slowing economic growth in China which is the highest consumer of copper in the world. Hence, we expect copper market to be balanced for the year 2012.

Outlook It has been quite some time that we have seen a continuous slowdown in the Chinese Economy. Despite a couple of cuts in benchmark interest rates and series of RRR rate cuts, we have not seen any turn around in the economic data.

Copper a main gauge of global economic health had been getting major support by the additional Quantitative Easing program by the Federal Reserve. But, with the magnitude of the impact of QE3 falters we do not find any major reason for further uptick in copper prices. Financialization of commodities is one of the major reasons for copper to sustain above $8000 per tonne. As Iron Ore prices collapsed from $180 per tonne to $90 per tonne in the year 2012 we may see a similar response in copper.

Copper is also a subject to major substitution risk from Aluminium. If prices remain at the current levels we may see major portion of copper industrial application being substituted by relatively low cost Aluminium.

Large investment banks and commodity trading houses have been stocking copper in anticipation of SEC may give green signal to go ahead with copper ETF. So more than actual demand financial demand is driving up the prices, where the actual demand is faltering.

With rising refined copper production backed by increase in warehouse stocks in China, the physical premiums have been under pressure. There is no major setback as far as supply of the red metal is concerned whereas; the demand has been lackluster at the

ground level.

We also expect a further drop in the refined copper imports of copper by China as weak domestic demand may dampen further import of the metal.

Also, we do not expect any major stimulus from China, as China experiences its slowest growth in foreign currency reserves. And, with no further rate cuts announcements we feel that the country has run out of policy tools.

However, due to the liquidity and low-base effect we may see slight improvement in economic data points in China. This may provide some light in the tunnel for the traders. However, at prevailing prices things do not seem to improve much at the ground level.

Based on the above discussed factors we feel that copper prices are posed for a correction. We recommend going short on Copper between $8100-$8200 per tonne on LME for a target of $7400-$7500 per tonne and in India prices may test levels of Rs.405-410 per kg until the end of the year.

Copper: Poised for a Correction | 5 October 23, 2012



Name Kunal Shah Vikash Bairoliya Sunit Mehta Ankita Parekh Somya Dixit Ravi D'souza Sameer Kazi Devidas Rajadhikary Harshal Mehta Mohammed Azeem ADVISORY TEAM Sakina Mandsaurwala Ishwar Kelwadkar

Designation Research Head Research Analyst Research Analyst Research Analyst Research Analyst Research Associate Research Associate Technical Analyst Technical Analyst Technical Analyst


Commodity Advisor Commodity Advisor

Disclaimer: This Document has been prepared by N.B. Commodity Research (A Division of Nirmal Bang Commodities Pvt. Ltd). The information, analysis and estimates contained herein are based on N.B. Commodities Research assessment and have been obtained from sources believed to be reliable. This document is meant for the use of the intended recipient only. This document, at best, represents N.B. Commodities Research opinion and is meant for general information only. N.B. Commodities Research, its directors, officers or employees shall not in any way be responsible for the contents stated herein. N.B. Commodities Research expressly disclaims any and all liabilities that may arise from information, errors or omissions in this connection. This document is not to be considered as an offer to sell or a solicitation to buy any securities. N.B. Commodities Research, its affiliates and their employees may from time to time hold positions in securities referred to herein. N.B. Commodities Research or its affiliates may from time to time solicit from or perform investment banking or other services for any company mentioned in this document. Address: Nirmal Bang Commodities Pvt. Ltd., B2, 301 / 302, 3rd Floor, Marathon Innova, Opp. Peninsula Corporate Park, Ganpatrao Kadam Marg, Lower Parel (W), Mumbai - 400 013, India

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