Funds to prop up copper till demand re-emerges Low stocks, supply issues to lend support

Print this page Posted on : 11-03-2009 by recycleinme.com

''A number of funds have been taking full advantage of the price pullback this week and will, in our opinion, continue with that strategy."

Dow Jones

Sydney, Nov. 2

Copper prices trading at pre-crisis levels have prompted warnings of a bubble, but historically low stocks, supply issues, a weak dollar and China's strength piquing the investment community will shield the metal from a correction, market watchers said on Friday.

Outrunning fundamentals

London Metal Exchange copper wobbled as the dollar rose last week, falling by more than 3 per cent from a 13-month high above $6,700 a tonne, giving credence to concerns that copper is outrunning its fundamentals as demand in developed economies remains well below levels seen during 2007 and 2008.

But the dynamic of a very low stock-to-consumption ratio, strikes and mine accidents and signs that OECD economies will recover in 2010 is not lost on people in the investment community, who are set to keep supporting prices between a re-stocking pause in China and broader demand expected to kick in next year.

''A number of them (funds) have been taking full advantage of the price pullback and will, in our opinion, continue with that strategy,'' said Mr Alex Heath, head of base metals at RBC Capital Markets in London.

Inventory build-up

The market is worried about speculative stocks in China, estimated at 5,00,000 tonnes, pressuring the market in combination with strategic stockpiles held by the State Reserve Bureau.

In addition, exchange stocks at the LME and Shanghai Futures Exchange have been rising for a number of weeks in the face of rising prices - adding to doubts about the longevity of the rally.

But when taking into account the bigger picture, a stock-to-consumption ratio at just over three weeks tells a different story. ''For where we are in the cycle, we would expect that ratio at up to 12 weeks,'' Citigroup analyst Mr Alan Heap said.

China's commodity demand continues to surprise on the upside as very strong commodity imports across the board for September showed.

While the market in China is ''looking less strong,'' with physical copper prices trading at a discount to SHFE futures for the past few weeks, ''demand in China is not weak,'' said Barclays Capital analyst Yingxi Yu in Singapore.

Citigroup estimates China's underlying copper demand growth, taking restocking into account, at 20 per cent so far this year.

Analysts also argue the build in exchange stocks is offset by a fall in producer inventories. The latest available data from the International Copper Study Group show that from January to July, producer stocks have fallen by 114,000 tonnes to 492,000 tonnes.

One analyst estimated producer stocks to have halved to just over 300,000 tonnes in the year to date, largely driven by supply issues and plummeting copper scrap availability.

Producers moving stock into LME warehouses as collateral for financing deals as banks tightened credit policy is another factor, market watchers said.

Supply pipeline struggling

Future demand expectations aside, copper's supply pipeline is already struggling. A strike at BHP Billiton Ltd's (BHP) Spence mine in Chile has stretched for more than two weeks and labour contracts at a number of mines in No. 1 copper producer Chile are coming up for negotiation before the end of the year. Accidents have cut into mine supply, as have longer-term issues with falling ore grades at large but old mines and a dearth of new projects coming online.

The shortage in scrap and tightness in concentrate supply is already impacting Chinese smelters, which take a majority of scrap to feed the furnaces, reducing them to operate at less than 80 per cent of capacity.

''When we set all this against a market background of relatively low global levels of surplus stocks and a consumer market that has yet to begin the process of restocking in earnest, then the current round of supply disruptions provides all the ingredients for a substantial run in prices next year,'' said RBC's Mr Heath.

Source : Business Line