Is Copper The New Precious Metal?

asiablues's picture

By Economic Forecasts & Opinions
Special thanks to Ms. Rhonda Bennetto for her contribution to this article

Copper soared this week in London and New York, striking a new 16-month high, and headed for the biggest annual gain (140%) in more than two decades, as traders fretted about possible strikes at Codelco’s giant Chuquicamata mine may disrupt supplies from key producer – Chile. (Fig. 1)

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.

Technically Bullish

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 mostly to 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.

Economic Forecasts & Opinions

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ATG's picture

So Asiablues,

your profitable point is what exactly?

Is copper going higher or lower in 2010?

How about lower?

http://www.jubileeprosperity.com/

 

 

 

asiablues's picture

China's resource acquisition goes on ......

"China Railway Construction Corp. and Tongling Nonferrous Metals Group Holdings Co. offered $679-million for Canada's Corriente Resources Inc. to gain copper resources in South America." 

 

"Corriente's reserves in Ecuador hold about US$50-billion worth of copper"

 

"China's currency regulator, which oversees the country's US$2.27 trillion of foreign-exchange reserves, said on Dec. 8 it will "actively support" companies investing overseas."

http://www.chinamining.org/Investment/2009-12-29/1262049266d32823.html

master che's picture

copper is needed to produce gold...

Anonymous's picture

nothing new here....copper will be a portion of the yuans backing in 10 years and in 10 years todays prices will be deals even in the temporary overbought conditions

Jendrzejczyk's picture

According to my highly accurate "I Always Get Screwed in Life Copper Pricing Predictor"TM, copper will reach historic highs just as I have to buy massive amounts of wire. Prices will drop after the second week of February.

Mark Beck's picture

Copper speculation? Perhaps.

I have always viewed copper as the commodity of real recovery. That is its demand, with nominal inventory lead time, tracks industrial production quite well. So I ask, what is really driving the price of copper? A stock piling surge? For what reason?

Mark Beck

Amish Rake Fighter's picture

There's actually copper bullion for sale on EBAY.

I didn't even know it existed but there are bars, ounces and other smaller denominations.

If this is a relatively new phenomenon, it might have contributed to the recent price action.

Grand Supercycle's picture

COPPER (the economic barometer)
An extremely overbought chart.

The USD uptrend on the daily chart remains up and the weekly chart is now looking bullish.

I'm still expecting a substantial USD rally.

http://www.zerohedge.com/forum/market-outlook-0

Anonymous's picture

There is not one person has said this.

Copper is a weapon of war in good supply.

Anonymous's picture

All those Iphone & Ipod (motherboards) need Copper !! Its the New Deal..did you not hear about it ??

Hephasteus's picture

Copper just follows the junk bond penny stock cycles. It's cheap to start with so it's got more room to inflate than expensive things. You can inflate 1984 microsoft 17 times but you can't inflate 2009 microsoft even  3 times.

Pondmaster's picture

Zinc doubled in last year . Wonder if NGA (North American Galvanizing ) hedges prices , stock price looks good . 

 

http://www.kitcometals.com/charts/zinc_historical_large.html#1year

RobotTrader's picture

Both FCX and PCU have failed to confirm the new highs in copper.

Similarly, the OIH has failed to confirm the new highs in oil.

Probably another leg up in the dollar and a commodity rout coming this way.

dark pools of soros's picture

if this was a normal recession I'd be all in with you but it looks like fiat currency is caught with its pants down and locked out of the house - too many obligations

London Banker's picture

What will drive a rapid spike in the USD will be margin calls as other assets crash.  Virtually all margin in global financial markets is in USD cash or Treasuries, so a crash in equity and commodity markets fuels a massive corresponding spike in demand for USD cash and Treasuries.  This was a very clear dynamic in the post-Lehman period, when the Fed had to swap USD to other central banks so that they could in turn fund their banks to complete margin calls. 

Tie this together with Tyler's post yesterday about the Treasury auctions coming up, and you might think the Fed would collaborate with Wall Street to orchestrate a crash. Wall Street gets lots of lovely cash from margin calls, lots of lovely profits from being short equities and commodities, and the Fed gets its auctions away at near zero.

The Fed has a long history of exporting inflation during booms, and exporting deflation during busts.   By this means the outperformance of US markets is underwritten by the underperformance of foreign markets.

London Banker's picture

What will drive a rapid spike in the USD will be margin calls as other assets crash.  Virtually all margin in global financial markets is in USD cash or Treasuries, so a crash in equity and commodity markets fuels a massive corresponding spike in demand for USD cash and Treasuries.  This was a very clear dynamic in the post-Lehman period, when the Fed had to swap USD to other central banks so that they could in turn fund their banks to complete margin calls. 

Tie this together with Tyler's post yesterday about the Treasury auctions coming up, and you might think the Fed would collaborate with Wall Street to orchestrate a crash. Wall Street gets lots of lovely cash from margin calls, lots of lovely profits from being short equities and commodities, and the Fed gets its auctions away at near zero.

The Fed has a long history of exporting inflation during booms, and exporting deflation during busts.   By this means the outperformance of US markets is underwritten by the underperformance of foreign markets.

reflex_121's picture

Chopshop-

 

Holding out-of-the-money puts on FCX.  Too bad expiration is FEB 2010.  Thanks for the tech analysis though.  Copper (and the markets in general) seems a bit bubbly.

Anonymous's picture

I wonder, does the Chinese government worry that they have bought too much copper or bought too much Treasuries?  

Al Hamilton's picture

Fundamentals eventually prevail, and it looks like copper is far to the right on the bell curve

Anonymous's picture

Time to cash in all my buckets of pennies.

CHA-CHING!

Anonymous's picture

Chinese pig farmers are stockpiling copper.

SOLD

Anonymous's picture

That's nothing: Chilean copper miners are now day-trading pork bellies!

butchee's picture

Robo

Thanks for keeping it real. I have been watching these copper miners wondering when the wildebeest herd would suddenly change direction and trample a bunch of tourists on safari?   What is your take on TCK? Same leaky boat as FCX?

 

Periods

Daily Weekly

 
Chopshop's picture

thanks for the actionable heads up, Robo.

PCU plotted dark cloud cover on the weekly.  and much as i hate to say it: freeport does look like it might be tracing out a right shoulder here ... 12/28 intra-day high of 83.48 is but 2.5 cents shy of 1.618% off THE inflection point print of 83.455 ~ a multiple confluence of time / price symmetry hinting ixnay on more upside.

we were early in taking a look at freeport 2 months back, even as a warning.  that said, the 11/02 alternate count does appear to have traced out its initial subdivisions if FCX is topping out here and now.  gorgeous daily candles last week: 28th bear engulfing; 29th tweezer top; 30th doji; 31st bearish engulfing, which qualifies as a black marubozu bar in my book since upper wick was within 8% (c. 7.2%) of daily range.  weekly notched a single close above the 61.8% Primary degree inflection while monthly failed and volume has been utterly anemic since price crossed the 38.2% upward retrace from peak to trough at 58.31.  ord volume leg studies show a marked negative divergence with price.  all that said: only hard right edge will (soon) tell which way / how large initial channel range will be before a decisive break in either direction.

In registering an intra-day high of 84.28 on 10/23/09, Freeport (FCX) fell just 55 Fibonacci cents shy of meeting its 9/02/08 opening print of 84.83, a very important price extreme from the crash last Fall that still continues to provide stiff resistance .... Such alternate counts suggest that FCX could notch itself either one more new high within an open range interface that surrounds 85 - 88 or simply fail a truncated attempt at a new high over the next 2 weeks, prior to fulfilling its long-standing date with much lower prices to come.

El Hosel's picture

Yep, looks  like its "point and short" at this point. The banksters will pull the rug, low volatility equals weak bonus pool....Play it again Sam.

Anonymous's picture

China has got to be getting very annoyed by aluminium, iron ore and copper spot levels, massive amounts of stocking levels around the world. But no consideration for them on price that they are paying. The Chinese are no busy buying up everything that they can find in exploration, mining and tenaments in Africa, Australia and South America - just so they don't have to pay ridiculous hyper inflated (goldman sachs inflated) spot prices. Negating the market is there next move!

Anonymous's picture

Take a look at aluminium levels (or aluminum for you yanks)

Chopshop's picture

an excellent synopsis of where dr. copper, with his PHD in economic indicants, currently stands.  thank you for it, asiablues.

china has more than enough gold (capacity) to meet its own domestic, industrial demand as well as its own CB demand with slack to spare and has usurped S. Africa as the tip of that spear.

and there most certainly has been an explicit strategical imperative set in play by / with official commod stockpiling as well as an implicit attempt to obfuscate true price discovery via unilaterally Monroe-esque decrees like this: China's SOEs May Terminate Commodities Contracts

mannfm11's picture

It isn't the next precious metal.  Instead, like oil, someone is running a corner and the someone or someones are close to the exchanges and have long lines of credit.  Oil is the same.  It is clear there isn't a free market in play at this time.  We have been going to run out of stuff for the past 300 years.  Instead they just keep digging.  When this breaks, it will be like Amaranth in gas, except the game can probably be financed cheaper and there are more players.  Best guess is Goldman and a few European outfits along with the Chinese have a controlled corner in this stuff.  I am really amazed that silver hasn't been cornered as well, but then again, the supplies of silver are much greater than promoted. 

El Hosel's picture

  fm11,

"It is clear there isn't a free market in play at this time".  

Exactly, free money does not make a market, supply and demand have been turned upside down, (just like the charts for most asset classes).  Extreme complacency and false confidence appear to be the "strength behind the markets". The man behind the curtain won't let us or the stock markets down.... Yeah right.

SELL

Cistercian's picture

 Tin is up too.Tin + copper=brass.As we all know brass is used to make ammunition.War preparations are underway.

covertress's picture

"War preparations are underway."

Afghanistan, Pakistan, Israel/Iran, Yemen: It's a no-brainer multiple choice question. E: All of the above.

Base Metals Prices: http://www.24kt.us/bm

DoChenRollingBearing's picture

An interesting website for any cheapskates (like me) out there that tracks metal value of our coins is:

coinflation.com

Now you know why us cheapskates separate our pre-1982 pennies from the later ones.  Also note the US nickel now is worth a little more than $0.05 (metal value).

dark pools of soros's picture

those kennedy half dollars are looking better and better

DoChenRollingBearing's picture

Actually, ZINC and copper make brass.  Tin and copper make bronze.  I cannot find (easily) the past price performance for zinc, but I would think it has gone up.

Your point about brass & war is a great observation.

Cistercian's picture

 For some idiotic dyslexic reason I keep saying tin when I mean zinc re brass.Zinc is up too.

 Ammunition is hard to obtain in much of the US in any serious quantity.You get one guess where the factory capacity is dedicated.

Anonymous's picture

agree but I don't understand why Net Energy always seems to be a skipped topic everywhere. does it have nothing to it's merit? what we do have today isn't as easy to get at anymore and requires more techology as well as energy to obtain... if it held then both supply and price would be irrelevant, no matter how much there is or how high the price went...and that's without considering at all the costs of it's externalities.

mannfm11's picture

I would venture there is 5 million tons hidden somewhere.  The world housing market outside China has collapsed.  The game isn't continuing to march on.  One rogue trader in Japan ran a corner, hiding it in warehouses around the world and the price busted to 70 cents for several years while the US was in a boom and China wasn't exactly sitting still.  Once the wrapper comes off how overbuilt and unoccupied China is, they will sell this pile for under 70 cents.