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Copper looks red hot for next year

COPPER’S status as a widely used industrial metal meant it was always going to do well in 2009. Restocking, East Asian growth and growing confidence in the global economic recovery saw the price of the red metal on the London Metal Exchange (LME) rise to as high as $6,700 a tonne earlier in the year. This resurgence in the price of copper followed the metal falling to 14-year lows last November as investors feared the financial meltdown would severely affect consumption, world trade and industrial production.

But while the worst of those fears proved unfounded, investors are now worrying about the opposite problem: has copper in fact risen too far and too fast? The first signs that investors betting on the speed of the Asian recovery had perhaps overstretched themselves emerged back at the end of August when the Chinese Shanghai index started to take a dive. And although the base metal has managed to recoup those falls and then some, there is still a great deal of uncertainty in the global market, which leaves a question mark over the metal’s performance in 2010.

So should spread betters be taking a punt on further rises in the metal or should they be selling into the rally? Well, Chinese inventories of the metal are increasing steadily, reflected in the 34 per cent fall in copper imports to China – which is the world’s number one metal consumer – in October.

The International Copper Study Group expects a recovery in usage in most copper consuming countries for 2010. However, lower industrial demand and a partial drawdown of unreported inventories accumulated in 2009 is expected to reverse the growth in apparent usage in China and lead to a global decrease in usage of around 0.7 per cent.

World refined copper production for 2009 and 2010 is projected to remain relatively stable, decreasing by 0.8 per cent in 2009 to 18.1m tonnes and then growing by 0.7 per cent in 2010, to around 18.2m tonnes. This all points to stable supply and falling demand, which may put downward pressure on copper prices.

CONTINUED GROWTH
But even if analysts have overstated Chinese industrial expansion and already priced much of the recovery story in to the base metal, the bigger picture appears to be one of continued growth in industrial products in emerging markets.

Recent strong figures from Asia added to bullish sentiment about the metal last week. China, which has been stockpiling the metal to support its exporters, reported an astonishing 16.1 per cent annual growth in industrial production in October, beating analysts’ predictions of a 15.5 per cent rise. And in Japan, machinery orders surged 10.5 per cent in September, thumping forecasts of just 4.1 per cent.

Indeed, China’s state-backed research group Antaike predicts that in 2010, China’s real refined copper consumption will rise 8 per cent on the year to 5.83m tonnes, supported by the power and building sectors. And even if these official numbers are overly optimistic – it would not be for the first time – there are hopes that the US stimulus and inventory restocking in the Organisation of Economic Cooperation and Development (OECD) member states in 2010 will support the price of the base metal.

Flagging US consumer confidence over recent months and the expectation of weaker demand from China will prove negative for the copper in the short-term. Nonetheless, base metals are poised to benefit from both the OECD inventory restocking and the US stimulus programme, offsetting weaker China demand in the months ahead, says Barclays Capital analyst Gayle Berry.

Equally supportive for the price of copper is the continued weakness of the US dollar, says CMC Markets’ market strategist James Hughes. “Stimulus and lending rates remain on hold the dollar is likely to remain weak and with this weakness comes the strength in equities and most notably commodities,” he says.
He adds: “Federal Reserve chairman Ben Bernanke said that monetary policy will stay the way it is until the employment picture improves. It may be that this recent period of inactivity in copper is just a brief pause before we push higher again.”

Spread betters looking at trading the base metal can access the market through all of the major providers. But be aware that the spread betting firms won’t necessarily choose the LME contract as the underlying asset – copper is also traded on the Chicago Mercantile Exchange (CME). For example, IG Index offer two copper contracts: one is based on the three-month LME copper futures contract, with a spread of 20 and available to be traded between 8.30am and 5pm. But it also offers copper high-grade futures, which has the CME market as the underlying. This can be traded almost 24 hours (with the exception of 10.15pm-11pm) but the spread is 80. While there is little difference between the two contracts in terms of fundamentals, spread betters should make sure they are trading the right contract – that wider spread could make all the difference in terms of turning a profit in volatile conditions.

All industrial metals were tipped to rise as the economy recovered from the worst post-war recession. However, so far this year, copper has been the out-performer. Spread betters may be left wondering whether it can sustain this stellar performance into 2010, but with the emerging markets surging out of recession and the advanced economies emerging more slowly behind them, demand for industrial products, and therefore copper, can only increase. With a bumpy road to recovery forecast, there’s bound to be plenty of corresponding volatility along the way.