CASTING an eye back over 2009, copper was clearly one of the standout performers. Its price has risen 126 per cent over the past year, fueled by rising expectations about the global economy, China regaining its voracious appetite for industrial metals and a weakening US dollar increasing copper’s attractiveness (it is priced in dollars).
After such a stellar performance, it will be difficult for copper to replicate such gains in 2010. Conditions in 2010 are not looking as favourable as they did in 2009 and investors have been worried that the industrial metal’s price has risen too far and too fast.
There are three major risks facing the price of copper: Chinese policy tightening, a rising dollar and renewed fears about the global economy. We have already seen the price of copper to slip from a peak of $7,625 per tonne to below $7,000 a tonne this year on the back of these worries.
This has prompted some analysts to predict further falls for copper over the course of 2010. Capital Economics’ Julian Jessop forecasts that the price could fall to $5,000 a tonne this year. Over the medium to longer-term, he says it could drop even further to as low as $3,000-4,000 a tonne as Chinese economic activity becomes less copper-intensive.
We may see a small correction in the copper price over the course of 2010 simply because of how much it surged last year, but the drop is unlikely to be as much as $2,000 a tonne. Chinese tightening, a strong dollar, and weaker expectations for the global economy will not affect the price of copper to the extent that this will happen.
First, China is still vigorously consuming industrial metals. Recent data from the International Copper Study Group shows that Chinese apparent usage in 2009 until October grew by 1.8m tonnes – or 43 per cent – and nearly offset an 18 per cent decline in the rest of the world. And the latest manufacturing survey data for China released earlier this week showed that activity continued to grow quickly in January.
Even if Chinese demand for copper does abate this year as a result of tightening and an end to stockpiling, there should only be a minimal effect on price, says Barclays’ Capital Kevin Norrish.
He predicts that China’s copper imports will fall by 1m tonnes this year but argues that rising demand from other nations will counter that decline. Norrish expects copper prices to hit highs of $8,500 a tonne in 2010 because of supply constraints.
Barclays Capital predicts that copper will become more expensive by the end of the first quarter, reaching as high as $7,900 a tonne, before falling to $6,000 a tonne by the end of 2010.
Second, in terms of the US dollar, we will see it strengthen in the short-term but it remains structurally weak. For example, while analysts have raised their three and six-month forecasts for euro-dollar to $1.35, they have left their 12-month forecast at $1.45, indicating that they do not see sustained upside for the dollar in 2010.
Finally, expectations for a global recovery have been largely driven by renewed fears about sovereign debt issues in the Western world and Chinese tightening choking off growth. But the OECD yesterday said that China may well overtake the US in the next five to seven years as the world’s leading producer of manufactured goods.
Copper will not see the surge that it did last year but prices are equally unlikely to plummet. With little downside, going short would be a risky bet at the moment.