Copper has had a torrid time this last five months. From a high of almost $9000/ton the price has fallen steadily to well under $4000/ton today. However the market has bounced back recently and on November 26, LME stocks actually fell for the first time since October. So could this be the start of the bounce back for copper?
Like aluminum, copper has been sold as the dollar has strengthened. The market is in over supply and demand has certainly dropped in the developed world and many of the emerging markets. But at the same time, there has been a tight processing market for concentrates causing supply side issues. Miners, processors and smelters have been at the forefront of cutting production to try and accommodate the falling demand. Copper will benefit from the infrastructure investments planned for China and be bought forward in Europe and North America (in Europe at least there will not be significant new infrastructure spend. It will largely be planned projects brought forward earlier than scheduled). Hopes of an increase in demand and the support of production cuts have, for the time being, halted the slide.
The buying interest on the futures markets has largely been short covering rather than a return of the bulls. Physical demand has not picked up yet either for primary or scrap. At these price levels, most producers are still making money. The cost of production is thought to be below $3000/ton. Although the infrastructure projects will provide some support for copper, rallies are likely to be short lived – weighed down by the high inventory levels and generally low demand. In the longer term, demand is likely to come back strongly but that may not be until 2011 or beyond. In the meantime, price movements are likely to be short lived and buyers should look to cover their requirements on the dips and steer clear of the rallies.
Whatever the temptation to cover far forward, it is unlikely the bulls will make a return anytime soon. If the dollar strengthens again we could even see further falls.