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Copper Shines Bright, but for How Much Longer?

publication date: Apr 8, 2009
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Copper has soared 60% from its low in December, recent strength supported by suspiciously fast rising Chinese PMI numbers and continued official stockpiling; as the most broadly used industrial metal and therefore a leading indicator of economic growth, this has supported the cyclical recovery case. The bull case is predicated on heavy infrastructure spending plus official stockpiling offsetting very weak industrial demand in China. If the country continues to grow GDP between 7-8%, even if the rest of the world has zero demand growth, copper consumption rises about 10% annually, or 490,000 tons each year.

Betting on copper pushing much above the current $2/lb is essentially a bet on Chinese growth not only matching but beating current expectations, plus assuming an ongoing stockpiling appetite, and that's a brave call on both counts. We have collapsing demand levels in Europe, the US and Japan, and recent strength has been based on strategic buying by the Chinese SRB, a very tight scrap market and a rally in financial market sentiment, which has boosted both crude and copper. None of these factors can be expected to provide more than temporary support without a strong cyclical upturn in the global economy. I noted the sudden strength of Chinese demand in January in Metal Prices Bounce on Chinese Stockpiling...; Chilean producers had been shipping excess refined copper into US LME warehouses at the beginning of 2009; since then Chinese buyers have been aggressive buyers of surplus copper. But for how long more?


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