This Entry Talks About Copper

6 01 2010

Well this does not get any more obvious isn’t it? If you are interested in reading about the outcome of the strike at the two Codelco mines in Chile, click here. If you are interested in reading about China’s bid for Corriente, click here.And if the possibility of Novagold’s Galore Creek project resuming is making you happy, clap your hands. Otherwise, let’s get serious.

Where is copper heading this year? In 2009 copper prices increased 140%. Is it fair to expect such a performance to be continuing in the New Year? It depends what factors you are willing to taking into consideration.

It seems the Chinese are still buying copper from the LME and that overall there is a sentiment that this could continue for months. This begs the question: how strong is the Chinese copper demand? Since stockpiling a significant inventory of copper through the State Reserve Bureau in the first half of 2009 and imports have since then slowed down despite the deployment of infrastructure projects.

China is known to be price sensitive and, as prices rose, is suspected to have switched to importing scrap. Considering these factors (namely stockpiling and substitution), assessing the Chinese demand for copper can be tricky.

So far, one assumes that the stockpiles estimated to 400,000-500,000 tonnes are still in storage and have not been released yet. Still firms like GFMS are relying on the production of semi-finished copper products as proxy for Chinese demand for copper. According to GMFS such production has increased by 17% y/y towards the end of 2009 which could indicate that lower copper purchases by China are only temporary.

Reports of China planning on exporting copper have emerged. Some distributors cannot find buyers for refined copper as the local scrap supply is improving. Big players such as the Xi’an Maike Metal International Group have had to re-route some of their inventories to LME warehouses in Korea and analysts at CRU International see this as a continuing trend.

I don’t mean to be overly bleak but if China’s reduced its copper imports by dipping into its inventories, which is what Chile’s Copper Commission is expecting, China’s apparent demand could reduce by 17%. Now if it is re-exports copper, I don’t think that the increasing demand from recovering OECD countries will be enough to sustain copper prices. After all, a major part of the rally in commodities came from Chinese stimulus buying.

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One response

8 01 2010
LVZ

For a very long time copper has been an economic indicator or economic health and recovery. People this year were quite excited seeing the price of copper increase, implying a recovery. Unfortunately, like all commodities, the Chinese could be driving up the demand and skewing the real price of copper.

Here’s a fun article about copper and economics:

http://www.slate.com/id/2130034/

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