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Copper dropped from record highs in New York and London over concerns that lofty prices would dampen demand, and inflationary pressures in China would encourage the country to undertake aggressive monetary tightening, resulting in a decrease in the country’s demand for base metals.
By Leia Michele Toovey- Exclusive to Copper Investing News
Copper futures for May delivery fell 4.2 cents, or 0.9 percent, to $4.5955 a pound, on the Comex, down from the metal’s recent record of $4.657. On the London Metal Exchange, copper for three-month delivery dropped 0.9 percent, to $10,065 a metric tonne ($4.57 a pound). Earlier, the metal touched a record of $10,190.
Some analysts are speculating that high copper prices will result in decreased demand, using the recent rally of the metal, and the congruent rise in London Metal Exchange tracked inventories as evidence. London Metal Exchange stocks are up 6.6 percent this year, and at 402,425 tonnes are at their highest levels since August. Stockpiles in Shanghai are at their highest levels since June.
The overall market tone remains bullish. According the Commodities Futures Trading Commission data released last week, Hedge Funds boosted their bullish bets on copper by 14 percent in the week ended Feb. 8, the most in two months. Net-long positions were at 36,590 contracts, just 2,515 contracts below the record level at the end of last year.
In an interview with Resource Investing News, Wayne Atwell, Managing Director of Casimir Capital, explained the following fundamentals when questioned if the copper market can support such high prices. When the price of a metal rises to a certain point, substitution becomes a factor. If aluminum prices skyrocket, in some situations nickel can be used as a substitute. Substitution results in a decrease in demand, which in turn can help correct the price. Copper is used primarily in construction, cars, and electronics and generally makes up a very small percentage of these items. For many of copper’s applications, there is no viable substitute. The result is a commodity that has, what economists call “a low elasticity of demand”, or is “demand inelastic.” This means that changes in the price of this good have little influence on the quantity demanded. Therefore, the consumer will continue to purchase the item, in this case, copper, despite its high prices.
Atwell joins many Hedge Fund managers in having a bullish sentiment for the copper market. He claims the metal has more upside. In a phone interview, when questioned on copper prices Atwell claimed “perhaps $5.00 per lb this year, and $6.00 next year, as growth from China will fuel demand.” Atwell added that the supply demand fundamentals of copper remain very favourable.
Copper’s future is highly dependent on China, with political instability in the Middle East having a limited influence. If extreme instability hits the region and oil supplies are disrupted, then, obviously, oil prices will spike. Before that point, safe haven investments like gold and silver may benefit, however, the Middle East is not a large consumer or producer of copper. When it comes to copper, the focus will remain on China.
Tuesday’s price drop was largely attributed to sentiment further monetary tightening in China may affect base metals demand. A recent report showed China’s inflation exceeded the government’s 2011 target for a fourth month. The country has been trying to rein in inflation for months, hiking interest rates as recently last Feb. 9th. The reported rate, 4.9 percent, was lower-than-forecasted, however, price pressures were their strongest in at least a decade, a fact many predict will force the central bank to continue to tighten monetary policy.
Preliminary Chinese trade data showed copper imports jumped a surprise 5.7 percent to 364,240 tonnes. “Copper has been choppy today but it is a good story still and can push higher. Underlying fundamentals are very supportive but not super bullish. That’s the reason for the indecision by traders,” said Standard Chartered analyst Daniel Smith in an article in Reuters.
China is the largest copper producer and consumer in the world. Although China is the largest copper production base, there is big gap between supply and demand. China is highly dependent on imported copper ore, and as each year passes the country’s reliance on imports increases. China’s self-sufficiency rate has witnessed a downtrend in last 5 years.