Copper Prices: After the Drop Which Way Next?

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Copper has fallen dramatically this month and particularly over the last few days. A Reuters article reprinted in Mineweb asks the question is “Copper a Buy or a Sell?” a similar conundrum faced by many copper consumers at the moment should I take advantage of these lower prices and book forward now or wait in the expectation prices have further to fall?

The drop in oil and metals prices has been in response to two main drivers as a Financial Times article explains. The sharp correction in commodities came as the US dollar surged to a four-year peak against the euro. As most commodities are priced in dollars, the appreciation of the US currency tends to lower their price of the commodity. The article quotes Kevin Norrish, a commodities analyst at Barclays Capital  who when referring to Europe’s debt problems and concerns about a Chinese economic slowdown said, “People are getting very worried about the macroeconomic landscape, but the reality is there is no sign of a real impact on economic growth and commodities demand. The speed of the fall was driven more by investors liquidating long positions than by those shorting the market. As the prices came off and risk aversion took hold investors liquidated positions indiscriminately the paper said.

Analysts appear split as to whether the metals market has further to fall. The chartists are seeing continuing weakness and say the greatest risk is to the downside. Certainly many including HSBC are expecting the euro/dollar exchange rate to fall to 1.20 in the coming weeks which will push the dollar higher and further depress prices, but the fundamentals medium to longer term are looking strong. Rio Tinto along with many other miners are predicting lower copper production this year than last due to falling ore grades. Andrew Harding, chief executive of the group’s copper unit, is quoted in a Reuters article as saying mined copper output would fall to about 680,000 tons in 2010 from 804,700 tons last year. Rio’s main copper mines are Bingham Canyon in the United States and stakes in Escondida in Chile and Grasberg in Indonesia. “The global copper market would likely see a small surplus this year, but the market balance would flip into a strong deficit in 2011. Harding is quoted as saying, ” We will probably end up this year in a little bit of a surplus, but probably with a very strong deficit next year and that is likely to be sustained.”

Standard Bank in an investors report today saw the highest correlation between copper prices and the equity markets. Saying if equities stabilize and move higher, so will copper. The issue is with risk aversion in charge both Asian and western stock markets have been headed downwards, but it could be a useful pointer going forward.

The answer is no one knows which way prices are going next. In all probability there will be continued weakness at least for the next few weeks as the consequences of Europe’s debt problems are evaluated. Much will also depend on perceptions of future growth in China. So far the authorities have engaged in low key quantitative tightening, raising reserve requirements and lending criteria. But inflation is likely to become an issue in China this year and if the authorities have to step on the brakes fears that growth could drop sharply and with it metal demand could have a profound impact on copper prices possibly driving them down to US$ 2.50/lb. On balance a wait and see approach is probably best, the most likely scenario being prices will trade sideways or fall going forward rather than rise from current levels.

–Stuart Burns

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