(Reuters) – The market may be too sanguine about the outlook for copper prices, as import demand in top consumer China shows signs of increasing just as an anticipated global supply surplus is looking vulnerable.
Shanghai copper fell on Thursday when trading resumed after a three-day holiday, with the most active October contract dropping by as much as 3 percent to 51,350 yuan ($8,354) a tonne in early trade.
While the decline was largely a catch-up to weakness in London earlier this week, it’s indicative that traders aren’t overly concerned about the supply outlook.
The Shanghai slump came a day after Freeport-McMoRan Copper & Gold Inc declared force majeure on deliveries from its Grasberg operation in Indonesia, the world’s second-largest copper mine.
The legal clause allowing the company to miss contracted shipments comes after the mine was shut indefinitely after two accidents in May claimed the lives of 29 workers. Indonesian authorities want the mine closed until investigations into the incidents are completed, a process that may take several months.
So far about 36,000 tonnes of copper output at Grasberg has been lost. For every month mining remains suspended about 42,000 tonnes will be added to the current figure.
The Grasberg shutdown follows the disruption to output at Rio Tinto’s Bingham Canyon mine in the U.S. state of Utah after a landslide.
A third factor for refined copper supply is the loss of output from Chinese scrap processors, who are battling supply shortages, leading to the shutting of some processors.
As much as 600,000 tonnes of copper may be lost from the market this year because of these and other disruptions, Morgan Stanley analysts estimated in a June 10 note.
While this doesn’t completely erase Morgan Stanley’s forecast global copper surplus of 930,000 tonnes for 2013, it goes a long way toward making the market tighter than most had anticipated at the start of the year.
The threat to copper supply should be enough reason not to get too bearish on prices over the next few months, but other factors also suggest the market may be tightening faster than anticipated.
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