No one would argue that the main driver in the copper price this year has been Chinese consumption. It was the surge of real consumption, stockpiling and plain speculative buying initiated by the Chinese SRB at the turn of the year that set in chain a rapid rise in price from under $3000 per metric ton at the end of 2008 to nearly $7000 per metric ton today.
Over the first 10 months of this year, Reuters estimates that apparent copper consumption in China rose 45.6% over the same period last year to just over 6 million metric tons, that is about a third of estimated annual output globally. On an annualized basis, China is on track to consume 7.2 million metric tons of copper. However imports slumped in October suggesting China’s appetite may have reached its limits for the time being. Even China’s real industrial consumption cannot have increased by 45% year on year, a proportion of that buying was for stock, both as consumers hedge against further price rises and as speculative market positioning. In September, imports surged 28.7% over the year before, but as arbitrage opportunities declined in October after Chinese prices fell well below the LME benchmark, spot market purchases dropped significantly prompting traders to delay contracted shipments. According to this report, high inventories in China, built up in anticipation of rising demand and prices had reached a five year high finally resulting in the 20% drop from September to October as buying slowed and exports increased.
Dan Smith an analyst at Standard Chartered is quoted in Reuters as saying, “The fundamentals don’t seem to be particularly supportive, (but) there is a lot of investor interest in the base metals complex, pushing things higher. A weaker dollar, which makes metals cheaper for holders of other currencies, has also helped to support copper prices. Many investors have been piling into commodities since the beginning of April when markets started to believe the worst of the recession could be over. But traders expect prices to slip later this week as hedge funds take profits — without which they don’t get their performance fees — ahead of their year-end on November 30.
At nearly 430k metric tons, LME stocks are the highest since March and the end of the strike at BHP’s Spence mine should add to metal availability going forward. Copper prices are not set to dramatically slump even though the fundamentals look less supportive in the short term. Liquidity is such that there will continue to be a flow of money into the base metals markets looking for medium terms gains and in the medium to longer term, copper has a lot going for it. So however irrational the current strength of copper seems, the reality is, short term dips excepted, the price is likely to remain firm next year. Those buyers able to access resting orders or fix prices may like to consider fixing on the dips this year for a proportion of their 2010 requirements.