LONDON (Thomson Financial) - Copper continued above 8,000 usd as strong buying interest from China and falling stockpiles of the red metal gave prices a boost.
Chinese copper smelters have been operating at a lower capacity in recent weeks due to power shortages caused by the heaviest winter storms in decades, forcing Asian buyers to source more supplies from further afield.
London Metal Exchange (LME) monitored inventories have fallen by almost 30 pct since the beginning of the year, overshadowing ongoing economic concerns and driving prices to their highest level since last October. Inventories dropped by a further 4,025 tonnes to stand at 140,350 tonnes today.
"The rally in prices has been underpinned by the rapid pace in LME stock withdrawals and solid underlying demand from Chinese semi-fabricators that have returned to the spot market to restock following the Chinese New Year," said analysts at Barclays Capital, though they cautioned that short-term market tightness in Shanghai appeared to be easing, which should keep a lid on prices.
At 1.23 pm, LME copper for 3 month delivery was up at 8,063 usd a tonne against 7,974 usd in late New York trades. Earlier the red metal hit a 4-month peak of 8,095 tonnes.
Strong Chinese demand has pushed concerns over the health of the world economy to one side for now, but analysts have cautioned that further poor economic news out of the US could still dent market sentiment. Fears of a recession in the US have weighed on prices in recent months, with the demand outlook for industrial metals closely linked to global economic growth.
Tighter economic policies in China may also go some way to reigning in buoyant Chinese demand for copper and other industrial metals, with rapidly rising inflation forcing the central government to take action to cool the economy.
"China inflation hit 7.1 pct in January which might prompt some further tightening," said Fairfax analyst John Meyer.
The continued rapid growth of developing economies like China during the ongoing economic turmoil has at the same time provided some investors with reason to be cautiously optimistic.
"The macro environment beyond the US has provided some cause for some optimism," said UBS analyst John Reade. "Growth forecasts have been downgraded by central banks but only by a moderate degree, and emerging markets in particular are continuing to benefit from growing domestic demand to offset a slowdown in exports to industrialised economies.
"However, the global economy continues to face key tests ahead and market complacency at this stage in the business cycle may only serve to derail a necessary global rebalancing and forestall a full recovery."
In other metals traded on the LME, aluminium was up at 2,841 usd a tonne against 2,825 usd at the close yesterday. On Friday, aluminium hit a 9-month high of 2,873 usd amid ongoing jitters over possible supply outages in South Africa due to power shortages in the key producer.
Lead was up at 3,105 usd against 3,030 usd, supported by a 525 tonne decline in LME inventories. Yesterday, the International Lead and Zinc Study Group reported that lead usage outstripped production of the metal by 70,000 tonnes in 2007.
Global demand for refined lead grew by 2 pct according to the group, with fast rising Chinese consumption more than making up for falling usage in the US, Europe and Japan.
In other metals, three month zinc was at 2,395 a tonnes versus 2,365 usd, while tin rose to 17,100 usd a tonne from 17,075 usd, supported by a 185 tonne drop in stockpiles held by the LME. Finally, nickel was up at 27,940 usd a tonne against 27,650 usd.
Copper consumers must feel giddy from this year’s roller coaster ride. Trying to predict when to buy has been a nightmare. Now we have a new question: What will the red metal do in 2008? The International Copper Group reports that the main engine of demand, China, will become a net exporter of metal in 2008 as new domestic production capacity comes on stream, reversing a significant demand for finished metal to one of additional supply to the world market. Following government efforts to cool the economy with tighter credit controls and the removal of export rebates, demand in China is forecast to rise by between five to seven percent next year, slowing from this year’s breathtaking 12 percent.
Copper inventories on the London Metal Exchange have increased 30 percent since the credit crunch hit the U.S. market in September, with the U.S. housing market showing no end to its 18 month decline. A similar story is unfolding in Europe. Copper demand is forecast to slow in these two important markets. The U.S. consumes 13 percent of world copper while Europe consumes a little less, but combined, they nearly equal China’s 20-30 percent. So if American and European economies continue to slow — and China becomes a net exporter — it won’t even take a recession to further depress copper prices. No wonder analysts are estimating $2.50/lb. for early next year, levels not seen since the beginning of 2007. The message for buyers is to keep price deals of short duration and monitor the markets to buy on dips. Volatility has been a feature of the market for the entire year, and we can expect that to continue in 2008. Most important of all, follow this blog for our thoughts on the market as the newest year unfolds!
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Discussing the ongoing 10,000 meter drill program at the Ghanzi Copper-Silver project
