Copper at a Near-Term Crossroad
Brett Hartke
Published 12/29/2010
Copper prices have ridden an extraordinary six-month rally to reach all-time highs as the year is ending, prompting some to predict a short-term correction while the longer-term picture remains bullish and intact.
Copper prices (Comex spot December contract) closed at an all-time high of $4.324/lb on Tuesday this week, having soared 51.2% from the June 4 low (close) of $2.860/lb. In December alone this key industrial bellwether metal had gained more than 9% with two days remaining in the year.
The most recent rally is part of a longer term run that stretches to 18 months if the 20% May-June selloff this year is included. During that time, copper has almost tripled from just $1.528/lb (and an even lower intraday level of $1.446/lb) on Jan. 1, 2009.
Renewed hedge fund interest, along with the proliferation of exchange traded funds (ETFs) focused on commodities, are assumed to be affecting copper prices this year to a significant degree, but most market observers note that main driver behind the metal’s meteoric rise is global industrial demand.
The role of speculative ownership in copper should not be understated, however, and has been a growing source of concern in some quarters. Consider that the IPATH Dow Jones-UBS copper ETF (trading on the NYSE under the symbol JJC) soared 54% from a 2010 bottom occurring in May through Tuesday this week, when it reached an intra-day high of $57.67/share. By mid-day Wednesday it had weakened very slightly to $57.50/share.
Regarding the London Metal Exchange, where the cash settlement price for copper was $9,391/metric tonne heading into this week, it was recently indicated that a single party as of last week may own anywhere from half to 79% of current stockpiles of the metal in exchange warehouses (excluding open futures positions). Further, there appears to have been a single dominant owner of copper stockpiles for more than a month.
Copper is currently described as overbought by some market observers and many traders, with the possibility of a near-term correction seen as increasingly likely given copper’s recent run-up. Others predict that record copper prices are already spurring substitution.
But there are no easy substitutes for copper in many major applications, and the build-out of infrastructure currently taking place in China and elsewhere in Asia and other rapidly developing regions is likely to trump incremental savings due to substitution of other metals such as aluminum for certain electrical applications.
Copper also continues to be in relatively short supply. One scenario put forth by Barclays Capital recently forecasts a supply-demand deficit in 2011 of 825,000 tons.
Brett Hartke is a contributor to ResourceInvestor.com who has more than 20 years of experience researching and writing about commodities and the metals markets.
