$2 FLOOR
Investment demand takes over the copper market
Fundamentals are important
but no longer the only consideration as true Chinese demand remains shrouded in
mystery
Author: Geoff Candy
Posted: Tuesday , 28 Jul 2009
Johannesburg -
The price of copper has jumped over 70% since the beginning of 2009 but,
there is still uncertainty as to where it is going next.
According to an analysis put out by Numis Securities, while "it is tempting
to infer this price strength as suggestive of an improvement in underlying
demand," especially considering there is strong demand for copper from China,
which saw record imports of the refined metal over the last few months and
significant restocking by the country's State Reserve Bureau.
But, demand from Western nations still reeling from the economic downturn has
been and, looks likely to remain weak for the near future.
Numis analysts, say, "We believe some of the recent increase in prices is due
to increased investment demand - especially since Q2 '09 - and a return of risk
appetite in the investment community. Underlying this is the fact is that most
base metal prices have risen in line with equities - suggesting that much of the
price strength is due to increased confidence."
This is also the view of copper specialist analysts Bloomsbury Minerals
Economics, whose Chris Welch told Mineweb that the level of price
increases seen in 2009 is not justified by the pick up in demand.
"Chinese imports have increased but Western demand has slowed. We see it as a
case of people investing in the metal on the back of the pick-up in Chinese
demand rather than just on demand supply fundamentals."
According to Numis in the last quarter of 2008, in the aftermath of the
collapse at Lehman Brothers, "appetite for risk dissolved with a withdrawal of
investment demand"
This, the group says, is evidenced by a collapse in the price of copper,
"with initially little underlying build-up of stocks.
"As Q4 developed stocks began to build substantially as physical and
investment demand buckled. Most of Q1 '09 saw stock builds with a relatively
consistent low price around US$1.50lb. Q2 we believe saw the return of some
investment demand and risk appetite. For the same stock levels as in Q1 the
price was consistently US$0.50/lb higher. So far in Q3 the copper price has
remained strong, even with some recent minor stockbuilds."
So where to from here?
Welch, maintains that prices should go down because of the current
fundamental situation but, he believes this is unlikely as there has been a lot
of bear squeezing recently.
Numis holds a similar view, "We believe that in Q3 the rally is likely to
idle as Chinese base metals imports look likely slow over the quarter. Stock
levels are already stagnating. However, barring additional systemic shocks to
the global capital markets, we believe that base metal prices are unlikely to
collapse back to the Q1 trough levels - currently investment demand appears to
be maintaining a floor of US$2/lb copper whatever the stock level and in the
last 10 days copper stock levels have been increasing marginally and cancelled
warrants have declined whilst the price has continued to increase."
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