Copper prices have surged back towards the level of $/t 8000, closing at $/t 7480 on Friday, following the news that operations at Peru’s Escondida, the worlds largest copper mine, had halted completely, due to workforce dispute, which may take a few weeks to resolve. The break in production comes at a moment of a strained balance between global supply and demand, with the latest statistics showing world refined usage increasing by about 2% y/y, and outstripping growth in production, which was down by 0.4% y/y in the first 4 months of the year, according to ICSG. The deficit has been only temporarily eased by increase in refined copper production, up 5.9% y/y in the first 4 months of 2006, driven by secondary production from scrap.
Our view: At this stage we see little prospect for the removal of ‘speculative premium’ in copper prices, estimated at $/t 3,000 by industry insiders. Our forecast 2006 annual average price of copper at $/t 5,857 (3M)/ $/t 5,968 (cash), is 8% below the 2006 average so far at $/t 6,351 (3M), and we consider raising our forecast rather than lowering it. We reiterate our copper price scenario for the upcoming years, considering the need to replenish world commodity exchange inventories of refined copper from the lowest levels in years. We reiterate our Buy rating for the stock, with the fair value estimate at PLN 130.3, implying a 17% upside.