Is Copper Set to Test $10,000 Again As LME Stocks Shrink?

A headline and opening paragraphs in an FT article this week suggest copper is set to re-test 2011 highs above $10,000 per ton as stocks flow out of LME warehouses.

Following the outflow of 120,000 tons of metal since October, this week has seen requests for a further 67,000 tons to be withdrawn, which if carried through will see inventories fall below 300,000 tons for the first time since August 2009, the paper reports.

Source: Financial Times

The fall in LME inventories comes after Chinese imports of un-wrought copper hit a record above 500,000 tons for December, as a combination of lower prices and a natural end to the de-stocking cycle that has been going on in China over the summer encouraged merchant buying.

To what extent this metal is feeding through to direct end-user demand is harder to say. Although growth has remained strong at above 8 percent in China, the copper price has been depressed by a lack of physical buying interest, which only began to return in the fourth quarter, coupled with a risk-off approach by investors worried that the eurozone debt crisis would get worse and drag other economies down in a wider banking and liquidity crisis.

Copper hit $8,130 per ton this week, following news that China’s GDP grew by 8.9 percent in Q4, beating expectations of 8.7 percent, according to Reuters, thereby reassuring investors that China has not slowed as much as had been feared in some quarters.

While suggestions from some quarters that copper could reach $9,500 per ton are probably optimistic, the current rally could well hold above $8,000 per ton for the first quarter. Much depends on developments in the eurozone, which has more potential to disappoint on the downside than surprise on the upside.

Copper is not responding to fundamentals in the way it was 12 months ago; it is being driven more by fear of another financial crisis. The positive news coming out of the US and Asia has served to counter the stronger dollar for now, but the metal faces significant headwinds to break $9,000 in the first quarter.

–Stuart Burns

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