Copper - Commentary

December high-grade copper futures traded at $3.586 per pound on Thursday morning, representing a 2.85% gain on the week. The industrial metal rallied to a five-month high of $3.5905 on Wednesday following a slide in the US dollar. This was instigated by the Federal Reserve, which on Tuesday evening confirmed that it stood ready to inject another round of stimulus to reinvigorate growth. The spectre of further QE consequently weighed on the US dollar, which in turn made metals appear intrinsically cheaper in foreign currency terms. Tight global copper supplies and resilient demand for copper from emerging markets have also supported the metal’s ascent. Trade data released earlier this week showed that China’s annual consumption of refined copper rose by almost a quarter in August, thanks to a surge in imports. Meanwhile, a separate report by the International Copper Study Group showed that world refined copper consumption surpassed production by 281,000 tonnes between January and June this year. This compares with a deficit of 125,000 tonnes in the same period a year ago. Copper output at the world’s largest mine is also poised to remain tight. The chief executive of Codelco on Wednesday said that the mine’s copper output will remain unchanged at 1.8 million tonnes in 2010 and 2011. Copper has gained 8.65% on the month and in the greater scheme of things it is probably not too unreasonable to expect a bit of a pullback, perhaps on Monday when most of the Asian market resumes trading following a three-day mid-autumn festival.

Copper - Commentary

Copper has underperformed over the week, gaining only 0.16% as speculation that China may impose further measures to cool the property market tempered demand for the metal. The People's Daily newspaper in China has reported that Chinese property developers are beginning to struggle with cashflow problems. This comes at the same time that speculation is mounting that China will enforce higher capital-adequacy ratios, which would tighten lending conditions in China. Goldman Sachs is estimating that capital-adequacy ratios in China could reach 15% by 2012. At the moment the largest Chinese banks must meet a capital ratio of 11.5%. Advancements in China's economy carries a huge weight in driving copper prices, as China is estimated to consume around 40% of the world's copper production. Copper, which is used extensively in wiring of homes and buildings, tends to move in line with developments in the property and industrial sectors. The world's second largest consumer of copper is the US, but the growth outlook for the US remains soft, with industrial production declining to a meagre 0.2% this week while the US housing industry is still struggling to get back on firm footing. That means that investors have turned to emerging markets to take their cues for copper demand. Despite this week's underperformance, many analysts are still bullish on their outlook for copper, with the availability of large copper deposits dwindling and the costs of refining high-grade copper increasing. Investors seeking to take a position in copper should be mindful of the volatility in copper prices, particularly in the current environment where uncertainty is hampering any clear direction for the global economy.