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Price upgrade boon for copper producers

by Dan Coatsworth

Lehman Brothers has upgraded its metal price forecast for 2008 from $3 to $3.90 a pound. Analyst Christopher LaFemina reckons demand for copper will stay strong this year while growth in new copper supplies will be slower than expected, propping up prices which had originally thought to have been under pressure as supplies increased.

Lehman Brothers’ bullish stance means earnings forecasts should be better at some of the major producers and drive up their share prices. Consequently, LaFemina has raised his targets for Xstrata (£43 to £60), BHP Billiton (£21 to £26) and Rio Tinto (£70 to £79).

The copper price has increased by around 12% on the past six months and 10% on the year. It is currently trading around $3.92 a pound ($8,635 per tonne), which is approximately the same as LaFemina’s price forecast for the year.

Royal Bank of Canada said in March that it expected copper to average $3.2 per pound this year, slipping to $2 per pound by 2011 on surplus supply. If prices stay at current levels, in line with Lehman Brothers’ forecast, then companies such as Xstrata should do well. Analysts had priced in lower copper selling prices to their forecasts.

That said, rising cost pressures could get worse and dilute the gains made by avoiding a drop in the copper price. Charles Cooper at Evolution Securities is predicting higher costs at Kazakhmys, one of the biggest copper producers. It shares LaFemina’s view that copper prices could be better than expected this year, albeit less bullish – forecasting a 10c rise to $3.10 per pound. However, Cooper says Kazakhmys’ costs will be increased on higher local inflation in its operating region of Kazakhstan.

Copper inventories have been falling, particularly in China where production is seen to be lower than a year ago among many of the large companies. Strikes in South America have also reduced copper output, all helping to support the selling price.