The Conversation (2)
Copper has made sharp gains in the last couple of weeks and this week broke through the $8,000 mark. The increase may be premature: it will take a long time for China’s infrastructure projects and potential US stimulus to translate into orders for copper.
Copper for three-month delivery broke through the $8,000 mark this week to rise to a four-month high, and the prospect of infrastructure projects in China and economic stimulus in the US could help sustain that upward trend. Whether that is good for copper in the long run is another question.
LME three-month copper was selling for $8,115.50 on Wednesday, and Friday’s spot price is $8,100.50. On Thursday, copper rose as part of the general spike in precious metals and North American stock markets that occurred after the US Federal Reserve announced a third round of quantitative easing, or QE3. New York copper for December delivery closed up 510 points to $3.74 per pound.
Last weekend, China’s president, Hu Jintao, told leaders at the Asia-Pacific Economic Cooperation summit in Russia that his government would “boost domestic demand and maintain steady and robust growth,” AdelaideNow reported. Nomura Securities economists said the planned highway, municipal and port projects could be worth around 1 trillion yuan (US$158 billion).
Copper is used in building construction, power and telecommunications infrastructure and in industrial and consumer products. As such, the red metal is considered a bellwether for the overall economy.
“This upward trend could continue. After the change of leadership in China we could see some renewed strong growth in the Chinese economy and we expect higher prices not only for copper but for base metals in general,” Commerzbank analyst Daniel Briesemann said, according to Reuters.
But copper’s fate may not solely hinge on China, according to a Seeking Alpha article written by Evariste Lefeuvre, chief economist of Natixis North America’s economic research department.
“Global copper inventories stand at their lowest level in several years,” states Lefeuvre, adding that the stock-to-use ratio is very low, meaning that prices will be very sensitive to “demand shock.” Further, “[g]iven the level of stock to consumption, there is potential for a 20% increase in copper prices. With U.S. housing and car production continuing to recover, pent up demand remains decent for copper.”
Chile-based Codelco, the world’s largest copper producer, said last month that its copper production in the first six months of the year fell by 6.2 percent due to harder rock, deeper deposits and lower ore grades. Still, other producers have announced increases in production. BHP Billiton (LSE:BLT,ASX:BHP,NYSE:BHP) said in June that output at its Escondida mine in Chile rose by 18 percent in the first six months of 2012.
“Production in older mines is picking up, so we can’t really rely on supply being constrained the way it has been,” Paul Dewison, director of base metals at consultancy BME Copper, an Intierra Resource Intelligence unit, said in a telephone interview from London.
That may not be a bad thing. “What would do the market the most good is if there is a price dip now and over the next six months. If the prices don’t start to erode now, then the prospects further out [for new copper production projects] aren’t particularly good.”
Dewison said the rate of increased use of refined copper has been stagnant and one reason for that is its high price. If prices rise now, there is a much greater likelihood that copper will lose the longer-term marketshare battle to alternative metals such as aluminum and stainless steel, he said.
Copper prices dipped after hitting a four-month high this week as some investors took profits before the Federal Reserve decision. Analyst Andrey Kruychenkov at VTB Capital in London told Reuters that it will take time for China’s infrastructure program to filter through to metal purchases.
John DiCecco of TrendCharts said earlier this week that the next couple of weeks will be significant in terms of determining how sustainable the current trend is.
If the copper spot price on CME “fails to close above $3.50 for the next two weeks and dips back below $3.30, this week’s bullish breakout will have been a whimsical bullish head fake,” DiCecco wrote on Seeking Alpha.
Securities Disclosure: I, Ragnhild Kjetland, hold no direct investment interest in the companies mentioned in this article.
