Defying the Dollar
The dollar remained strong against the yen and other key rivals, but copper took its cue more from the looming strike as well as the better than expected Chicago PMI. As such, the rebound in dollar had little impact on copper (as well as other industrial metals) on confidence about the bull-run into 2010, thanks mostly to speculative buying.
So far, the red metal has more than doubled this year, leading gains in the CRB Index of 19 raw materials, and climbed almost fourfold in the decade as consumption rose in emerging economies including Chindia.
However, despite the improving global economic backdrop, there is far from a consensus on how copper will fare throughout the next 12 months.
2009 - Beyond Reality
Despite its red hot streak in 2009, copper's continuous rally in the face of swelling inventories, a sign of weak consumption, has perplexed many in the market. Stockpiles and production worldwide have steadily increased this year alongside with copper prices. (Fig. 2)
The latest data showed London Metals Exchange (LME) stocks rose 6,375 tons to above 500,000 tons, their highest level since April. Furthermore, the almost 600,000 tonnes in LME and Shanghai exchange warehouses are enough to cover the lost output from strike at Chuquicamata for more than a year.
Copper A LA Gold
China's unprecedented $585 billion infrastructure-focused stimulus package and strategic stockpiling efforts have had a major impact on copper prices this year. This is evidenced by the 165% year-over-year surge of China's imports of refined copper to 2.58 million tonnes in the first nine months of 2009.
On that note, the market has looked beyond warehouses. Some even say copper is behaving more like gold rather than strictly a base metal. (Fig. 3)
Of course, a number of other factors such as an anticipated global economic revival, new investment cash, index/fund buying, a weaker U.S. dollar, concern over labor disruptions, have also contributed to overshadow bearish indications of the copper inventory build-up.
Copper Currency Standard?
While India is trying to accumulate gold reserves, China is going one step forward by buying up industrial metals on a scale that appears beyond the usual commercial reasons. Some believe Beijing may have made a strategic decision to stockpile metal as an alternative to US Treasuries and dollar holdings as it safeguards China's industrial revolution, while the West may one day face a supply crisis.
Speculation of an ultimate “Copper Standard” also swirled when in March, 2009, Zhou Xiaochuan, the governor of People’s Bank of China, reportedly called for a world currency modelled on the "Bancor”. The Bancor was to be anchored on 30 commodities - a broader base than the Gold Standard.
Copper “The Red Gold”?
Meanwhile, India’s $1.2 trillion economy expanded 7.9% in the 3rd quarter of 2009, the quickest pace in six quarters. The growth lagged behind only China among the world’s major economies with equally strong demand from auto and power sectors. Copper demand in India is expected to soar by 6% next year, in line with the GDP growth forecast of 7%. .
As China and India each is looking to compete and develop their economies together, India could step up their copper buying efforts as well. Then, currency standard or not, copper could become the ultimate red gold as a strategic asset as well as an inflation hedge.
Electric Avenue Will Take It Higher
China is expected to expand 8.5% this year, according to the median estimate of economists surveyed by Bloomberg. Urbanization plus the next industrial revolution led by hybrid cars need plenty of copper. China plans to boost its annual production of electric or hybrid cars to 500,000 in the next two years, up from 2,100 last year. Such a shift would require huge amounts of electrically conductive copper.
Copper prices are still off their all-time high of $8,940 on LME notched in July 2008, before the global economic downturn caused markets to tumble.
Most of the technical signals for copper (Fig. 1) are very bullish, albeit a bit over-bought on some indicators like RSI & Bollinger Bands. But since the market just put in a new high, it may continue to become more overbought before corrections may occur.
Right now, it looks like the $7,500 to $7,600 levels should be the next resistance with potential retracement towards $6,500 and $5,800 levels. But if Western recovery continues to disappoint, or remain mixed, as they currently are, then we could see prices revert back to between $5,000/t to $6,000/t in 2010.
Chinese Copper Control
China is the world's largest copper consumer with about 38% market share, and its record levels of copper imports this year has made up for some of the slack demand in the U.S. and Europe. Copper, the hottest among the base metals, is controlled mostly by China as the single largest buyer in the world.
Now, some market participants say imports of refined copper into China may not reflect demand for at least the next six months, or longer, as China digests stocks built this year as a result of record imports.
In addition, China Daily reported on Nov. 12, 2009 that copper stockpiles held in duty-free warehouses in China may be re-exported after surging to as much as 350,000 tons from almost none at the start of the year. The country's imports of refined copper may lower to 1.6 million tons in 2010. However, the 350,000 tons reportedly belong to mostly private speculators and account for a fraction of the total imports.
Clearly, there is some copper supply/demand imbalance in China as the country is not entirely immune to this synchronized global recession. However, with copper price doubling up in 2009 and as China generally prefers buying on the dip, this re-export could also be a strategic tactic of Beijing in an attempt to push down the prices of copper.
2010 – Reality Bites
The general “recovery trade”, predicated primarily on China and other emerging economies infrastructure and industrial growth, lifted copper to overshoot the underlying fundamentals and somewhat disconnected from reality in 2009.
The continued rising copper stocks suggest demand has yet to recover outside China. As we enter 2010 with China taking an expected copper break, the trend for copper prices will increasingly be determined by the shape of economic recovery in the OECD.
The U.S. is the dominant focus for signs of recovery. The EU 15, which accounts for about 20% of global copper consumption, is also important, but the lead will come from the US.
The past 12 month it's been a variety of reasons that lifted all commodities higher. Copper will unlikely have a repeat performance of 2009. The strength in copper may remain at least in the first quarter of 2010, but after that the market will face a lot of uncertainties regarding the Dollar, interest rate, monetary policy, China's copper imports/exports change, and the high inventories as well.
An Economic Precursor
Either as a currency or as a new precious metal, one thing for sure is that copper is a bellwether for the economy because it is mainly used in housing, power generation and other cyclical sectors; therefore, it tends to lead other commodities.
Copper price dynamics over the next year or two could serve as a precursor to see if Asia can shift its focus from an export-oriented model to one that’s more internal consumer-based, as well as a realistic gauge of the global economy.
Dian L. Chu