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Economists at research firm Capital Economics have a message for copper investors: get ready for a hefty drop in prices.
They expect that a perfect storm of slowing economic growth in China and Europe, weaker demand, growing supply and the potential for another financial crisis will result in 40-percent pullback in copper prices. They estimate copper prices will fall to $6,000 US per tonne by the end of 2012, and $5,000 in 2013.
That's in sharp contrast to the average analyst forecast for prices to rise to $8,567 by the end of the year, according to data from Bloomberg.
Copper prices closed at $8,400 a tonne on the London Metal Exchange on Monday.
China, currently the biggest consumer of copper, is at the heart of Capital Economics' bearish view on copper prices. Over the past decade, China's economy surged to become the world's second largest -- and in the process, helped to fuel a jump in copper prices, from $2,000 a tonne in 2003 to as high as $10,000 a tonne in 2011.
Capital Economics' Ross Strachan and Julian Jessop say the reason China's economy pushed copper prices higher is that much of the country's GDP growth was based on investment, which they say is metal-intensive. Investment is typically spent on fixed assets such as machinery, factories and inventories of raw materials.
"We believe that the necessary rebalancing of China's economy over the next decade is likely to see the metal-intensity of activity there drop sharply," the economists say in a recent report.
"China's demand for industrial metals has been temporarily boosted by the unprecedented and unsustainable boom in investment over the last decade. This has seen the share of investment rise to nearly 50 percent of GDP, much greater even than in countries with only slightly higher per capita incomes, such as Brazil and Thailand."
While fears of a slowdown in China may push policymakers to increase bank lending -- which would support economic activity and copper prices -- current high inventory levels of the commodity will prevent a significant price increase, Capital Economics says. Plus, Chinese copper consumers are beginning to substitute the metal for such cheaper alternatives as aluminum and plastic.
And the blistering pace of GDP growth in China is likely over, they say.
"Our below-consensus China GDP growth forecast of 7.5 percent for 2013 reflects the risk that policy-makers settle for lower growth after the leadership transition -- or that they simply cannot prevent a sharper slowdown as investment cools," they say. "Anyone banking on China's economic growth returning to the double-digit rates of the last decade will surely be disappointed."
Capital Economics adds that a slowdown in the country's booming housing market and a pullback in industrial construction such as railways and the auto sector will keep demand for the commodity in check.
But China is just one piece of the puzzle, Capital Economics says.
"In particular, the euro zone, Japan and the UK are all either in recession or perilously close," the economists say. "Indeed, the manufacturing PMIs [Purchasing Managers Index] in both China (which accounts for just over 40 percent of global consumption) and the euro zone (accounting for around 15 percent) are at levels consistent with falling copper prices, rather than the price increases that have actually occurred."
And recent years of global supply constraints due to labour disputes, weather disruptions and a lack of new projects are also set to end, they say. They expect copper mine production to grow 4.5 percent this year -- sharply higher than the 1 percent average since 2004.
"In addition, we expect global consumption growth to be less than 3 percent, highlighting the potential for stocks [stockpiles] to rise," they say.
Mix in the possibility of another financial crisis -- this time stemming from the euro zone's sovereign debt woes -- and investors could once again flock to risk averse holdings such as cash and U.S. Treasuries.
"The fall-out need not be as bad as that which followed the collapse of Lehman Brothers in 2008 for copper prices to drop sharply from current levels. After all, copper prices fell as low as $3,000 in late 2008/early 2009," they say.