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Copper Trade upside remains dicey – Trend of Buy on sharp dips seems ideal.


Copper Trade

Copper Trade upside remains dicey

World Bureau of Metal Statistics reported that Copper markets recorded a surplus of 53000 tons in the month of Jan-Feb 2012. The report showed that the total surplus for the year 2011 was 307000 tons. Refined production of Copper was 3.32 million tons, up 5.26% from the similar period last year. World Copper consumption was 3.26 million tons in Jan-Feb 2012 as per WBMS. The total consumption of Copper in the world during calendar year 2011 stood at 19.47 million tons.

Chinese copper demand expected to grow a little under 7% in 2012 and more positive signs ofU.S.demand may help offset the impact of lingering European economic woes. Xstarta says that an underlying strength in copper demand growth inChinaand some positive demand signs in theU.S.can be seen which may help to offset the difficulties inEurope. In Q1 2012, Vale said that copper production was 72,900 tonnes, down 12,000 tonnes from the previous quarter. The weaker performance was caused by a maintenance shutdown of the Sossego operations and the temporary stoppage of mining atSudbury.

The post-Lehman financial crisis induced certain tightness in copper fundamentals over the last couple of years.Chinafor the first time failed to register double-digit growth in consumption last year, although it should be noted that the ever-increasing base level of consumption ensures that in volume terms, the country’s copper demand remains considerable. The Copper Survey also identifies that whilst all end-use sectors saw a slowdown in growth globally, the largest increase in both tonnage and percentage terms came from the electrical and electronic products sector, which registered a 5% gain last year, driven by ongoing power grid investment in emerging markets. Even though the current high levels of copper inventories have evoked concerns from investors,Jiangxicopper believes that the situation is only temporary despite Chinese hard landing.JiangxiisChina’s largest copper producer. Copper prices have been weakened over the past weeks as investors believed that high Chinese inventories will diminish Chinese imports. This fear is corroborated by the fact that Chinese copper imports fell by 4.6% MoM to 462,182 tonnes in March. Domestic Chinese demand is also seen to be weak, reflecting the slowing economic growth. Considering thatChinaconsumes about 40% of the world’s copper, a surge in copper prices cannot be expected unless Chinese demand picks up. But first and foremost, what is required is for Chinese inventories to come down to a level which would encourage higher imports since this will send a strong signal to investors and hopefully boost prices. Benchmark LME copper prices are currently trading around $8000/tonne, down from $8600/tonne peak in March.

There is a continued negative impact on sentiment and consumption from the ongoing Eurozone crisis, and recent data and reports fromChinaindicate a cooling economy and subdued demand conditions. Near-term downside risks remain high for risky assets in general, including copper. Chinese refined copper imports have risen sharply up a massive 76% YoY at the start of 2012, the rise inShanghaiexchange stocks and reports of building inventories of copper in Chinese bonded warehouses suggest that this material has not been going into end use consumption. However, the continued monetary easing in Europe, North America andChinaparticularly in the face of weakening economic indicators should underpin price levels and support buying on dips. Prices could re-test the $9,000 level this year as improving demand and the impact of softer monetary policy drives increasing investment in the copper market. The market would, though, struggle to sustain any significant gains beyond this, given the current backdrop of heightened macroeconomic concerns and risks.

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