Episode 3, Part 2, BMO Commodities Analyst Bart Melek

The reason for this, Melek told us, is that China is coming “back to trend”, which is fundamental to long term global economic growth.

It turns out that unlike other sectors such as gold, rare earths and coal, China doesn’t produce much copper relative to its consumption, Melek said. “That means they’re a big net importer of copper. They can’t distort the market like they have with other metals.”

BMO also sees fairly robust demand going forward not only from China but increasingly from India and other developing countries in the long term as they develop infrastructure and capacity.

“We’re going to continue to see increases in urbanization and also steady growth in the developed world,” he said.

Then there are the supply side issues with copper that also contribute to tight fundamentals. Melek says that there are only a limited number of new copper projects in the pipeline. Add to that issues with labour negotiations at major producers around the world and “that means that the surplus for 2010 may be smaller than the consensus is thinking.”

In the big picture, Melek sees Chinese and developing world demand for copper as the main driver, but perhaps surprisingly he also sees short term growth from the US as an important factor driving the fundamentals.

It turns out that although the US employment is still suffering deeply post the “great recession”, it will still see demand for copper grow, which hasn’t happened for some time.

“If you recall we had a massive decline in housing in the US, destruction of the auto sector and now both are in recovery mode… I acknowledge that the levels from which we’re coming are low, but growth is growth and it will contribute to positive growth which we haven’t seen for a while.

“For this year and into 2011 we’re going to see the emergence of the US and the rest of the developed world as a driver for commodity demand and as industrial production and restocking takes place. Over the next couple quarters it will be the developed world that will be the driver of commodity markets.”

Driving this, says the senior BMO commodities analyst, are the massive stimulus packages erected by the US and other western governments.

“[BMO] is nowhere near as negative in their outlook for the US as a lot of other observers are. The short term looks fairly robust and in no small way because of the stimulus that is yet to be spent. Only 20 to 25 percent has been spent. There are  hundreds and hundreds of billions of dollars yet to hit the real economy — that hasn’t happened yet and it’s about to.”

BMO expects a deficit scenario in copper’s fundamentals by 2011, which will add further upward pressure to the price, which is anticipated to average $3.30 through 2011. Unfortunately, that doesn’t mean that there will be no unraveling of the sector before then. The risk of a near term correction is real for copper and other higher risk metals.

“They’ve gone up quite a bit and are up there relative to the cost curve,” Melek said. “Imports of copper and others into China could slow down. [China has] been importing at a record pace and at this point relative to current demand and supply numbers it looks like they could have temporarily imported too much.”

He pointed out that in an environment where equities are correcting with an attendant reduction in risk taking, commodities could suffer.

Nevertheless, long term demand growth and higher prices are the outlook, according to BMO. This, Melek said, is positive for the economy in general, and will lead to spin off effects in the broader economy, in sectors such as telecommunications services and retail.

.

Looking for metal prices? Click here!