Copper likely to trade lower in second quarter Scope for other commodities, especially farm products, to gain

Print this page Posted on : 04-02-2009 by recycleinme.com

Copper buying by the SRB over the three months to February is strongly overstating apparent demand and real demand growth is far lower, around 2.9 per cent.

Dow JonesNew York, April 1

Copper prices outperformed other commodities in the first quarter of 2009, but the red metal may not log a repeat performance in the second quarter as Chinese purchasing may wane and equities retrace recent gains.

Strongest component

Although the Dow Jones-AIG Commodity Index is down 6.02 per cent so far this year, the copper sub-index has posted a gain of 29.12 per cent, making it the strongest component so far in 2009. Copper in the index was up 19.34 per cent for March, second only to lead, while the overall index for the month increased only 3.96 per cent.

Copper's gains in recent weeks have come as China, long a driver of demand for the metal, increased purchases of the commodity. Another more recent leg of support came amid optimism sparked by a stock-market rally.

demand overstated

But it remains to be seen whether that support will continue for copper into the second quarter.

''At this point, it doesn't feel like it,'' said Mr Frank Lesh, broker and futures analyst with FuturePath Trading.''We question whether that Chinese buying was for using product or just for their reserves. They're about the only place we saw demand improve.''

Copper prices have rallied strongly on the back of Chinese State Reserve Bureau buying and related purchases, with three-month London Metal Exchange copper and front-month Comex copper gaining nearly 50 per cent from December lows to last week's peaks.

But copper buying by the SRB over the three months to February is strongly overstating apparent demand, and real demand growth is far lower, around 2.9 per cent over the same period a year earlier, Australia's Macquarie Bank said in a Monday research note.

The SRB, a government agency, bought 300,000 to 400,000 tonnes of copper over the three-month period for domestic stockpiles, boosting copper prices. But apparent demand data for December to February showing growth of 27.4 per cent on year over that period are ''overstating underlying consumption growth in China,'' Macquarie said.

Room for others

The second quarter may offer room for other commodities, especially agricultural products, to outshine copper.

Crop issues in Colombia, Vietnam and Costa Rica could boost coffee; flooding or heat could benefit grains; and tight supply could support a livestock rally, said Mr Sterling Smith, Vice-President with FuturesOne. ''Any of these could outperform copper, which could be in a corrective mode,'' Mr Smith said.

"Part of copper's recent rally has been''a big oversold bounce,'' Mr Lesh said. Rising equities have helped, and as the stock market starts to retrace those gains, copper could follow, Mr Lesh said.

Barclays bullish

Others are more bullish.

Barclays Capital said in its quarterly commodities outlook that it expects crude oil, copper, grains and gold to be the strongest performers within the commodity complex over the next few months, with aluminium and diesel markets set to be among the weakest.

''In an environment of contracting growth, precious metals and agriculture usually outperform,'' Barclays said.

''But the speed of production cuts in crude oil and base metals markets, plus a modest improvement in financial market sentiment, is prompting a recovery in some growth-sensitive commodities, notably copper and oil,'' Barclays said.

''Nevertheless, the recovery still looks fragile,'' the note said. ''Right across the commodity sector, markets remain vulnerable to another leg down in economic growth expectations.''

Mr Ralph Preston, senior market analyst with Heritage West Financial, also sees higher prices for copper and oil, saying the metal will likely continue to outperform other commodities as the US and Chinese economic stimulus plans bolster demand.

''I'm using copper and crude oil as a barometer to gauge these stimulus packages,'' Mr Preston said. ''I'm looking for copper to lead the way.''

Source : Business Line