Copper Recovers on Bargain Hunting

- September 27th, 2011

Copper prices staged a modest recovery on Monday, gaining 4.4 percent on the COMEX and 4.1 percent on the LME, as investors digested last week’s slide to a 14-month low as an opportunity to bargain hunt.

By Leia Toovey- Exclusive to Copper Investing News

Copper prices staged a modest recovery on Monday, gaining 4.4 percent on the COMEX and 4.1 percent on the LME, as investors digested last week’s slide as an opportunity to bargain hunt. On Tuesday, the red metal posted more gains, tracing the upward momentum in equities, over positive sentiment that the Eurozone would take the necessary steps to avert a financial disaster.

Last week, the metal plunged to a 14-month low, as struggles in the Eurozone and a bleak outlook for the United States dampened demand prospects for the industrial metal. According to data from the US Commodity Futures Trading Commission, last week speculators were the most bearish on copper since July 2009, as managed-money funds held net-short positions in copper futures and options. The data showed that speculators’ wagers on falling COMEX copper prices totaled 6,672 futures and options contracts as of Sept. 20.

On Monday, the reentry of investors back into the copper market was largely attributed to bargain hunting. “It would seem that the fall in prices over the past few days is now regarded as excessive,” said Daniel Briesemann, an analyst at Commerzbank AG in Frankfurt, said in a report. “The low price levels are being viewed as attractive buying opportunities.”

Margin increase

Last Friday, the CME Group announced that it would increase the collateral requirements to trade benchmark copper by 18 percent. The change, which went into effect at the close of trading on Monday, requires that speculative investors post $6,750 to open a contract and $5,000 to hold it overnight.  Analysts claim that the margin increase did not have a large impact on the market. Any differences between COMEX copper prices and benchmarks for the metal traded on other exchanges are typically closed quickly by traders looking for an opportunity to profit, and, on Monday, the market did not witness an unusual level of activity. At the same time that the group announced that it would increase the collateral requirements to trade copper, it also announced that it would hike the requirements to trade gold and silver.

Supply disruptions

Perhaps the one bright side of the struggling copper market is the fact that the rash of supply disruptions that have plagued copper suppliers this year have failed to impact prices. In the summer, Goldman Sachs (NYSE:GS) announced the amount of lost copper supply due to these disruptions would exceed estimates. When investment firms make their predictions for the copper supply/demand balance, and prices, they generally “bake in” a certain amount of metal production that will be lost, due to various supply disruptions. Greater-than-expected losses can contribute to upswings in the price of the metal; however, so far this year the copper market is reacting more strongly to signals of declining demand, and ignoring the supply disruptions. Analysts are still cautious, warning that if labour disputes drag on for too long, copper prices could spike.

That being said, labour disputes are continuing at Freeport-McMoRan Copper & Gold Inc.’s (NYSE:FCX) Grasberg Mine in Indonesia. Workers recently announced that they are planning to stage a rally on Sept 29th, after last week’s government-brokered talks between the company and the union broke down. Approximately half of the 8,000 non-staff workers at Grasberg have walked off the job since Sept. 15, demanding pay more in line with what Freeport pays its workers, on average, around the globe. “We have conducted a peaceful stoppage in the 12 days of strike, but the management doesn’t appreciate that and has declared that our activity is illegal,” claimed Virgo Solossa head of organizational affairs at Freeport Indonesia’s labor union. “We want to show that we remain solid and will question the ‘no work no pay’ note from management as well as sanctions against several strikers, to the manpower office in the rally.” Freeport maintains that it will uphold its legal right not to pay employees on a day where workers do not report to work.

Another supply disruption hit the copper market over the weekend, when a massive power blackout paralyzed mining operations in top copper producer Chile. The blackout, which lasted for around 2 hours, resulted in smelting operations at various Chilean mines grinding to a halt. Copper producer Anglo American (LON:AAL) said operations at its Los Bronces mine were halted by the blackout and state-run Codelco said its Andina division was shut down. The outage exposed the fragility of the power supply infrastructure, which is being blamed on Chilean President Sebastian Pinera. Critics claim that Pinera has not been investing enough money into upgrading the country’s infrastructure.

 

Securities Disclosure: I, Leia Toovey, hold equity interests in Freeport McMoRan Copper and Gold Inc. and Goldman Sachs Group Inc.

 

 

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