Copper and the Price Behaviour of Base Metals, Oil & Gold - Chris Welch,
Bloomsbury Minerals Economics
■ Mr. Welch outlined a number of issues that could affect the start-up and production of
copper projects in 2008. A lack of energy, water, equipment, and personnel are possible
risks to projects in South America, with environmental licensing a risk in North America,
equipment availability a possible issue in Australia, and transportation and political risks a
concern in Africa. Most notably, the current political situation in the Congo was highlighted
as the most likely risk to copper production in 2008, with First Quantum's Frontier project of
particular concern, according to Bloomsbury. Despite these supply risks, Mr. Welch sees the
copper market in 2008 having a surplus of less than 200 kt.
■ Mr. Welch highlighted that the relationship between commodity prices and LME
warehouse stocks has shifted upwards in recent years due to the interactions in the
metal market of fund-related investments. Bloomsbury estimates that index funds
currently control over 800 kt of copper, compared to the current LME warehouse stocks of
194 kt. It is this virtual deficit that effectively raises the inventory-price relationship curve
upwards. This relationship can also be observed in the other LME-traded metals, notably
nickel and aluminum. Bloomsbury estimates that the price of nickel could be as low as
$4.50/lb if the effect of fund-related commodity holdings was eliminated.
■ Scotia Comment - We agree with Mr. Welch's view that the involvement of investment
funds in the commodity markets has changed the price behaviour of the copper and other base
metals, resulting in a weakening of historical inventory-price relationships. Bloomsbury's
forecast for a surplus of less than 200 kt is in line with our estimate of a 197 kt surplus in 2008.