Should you invest in copper?

16 June 2010

Copper has suffered a spectacular fall from grace recently as fears of Chinese fiscal tightening and eurozone debt woes plague the market.

The base metal hit a nine-month low of around $6,056 a tonne last week and has plunged more than 20% since its peak of $8,043 in April.

A key driving force behind its sharp fall is the concern of overheating in China and the measures being taken by the government to dampen the property bubble - a major end user of the metal.

Imports of the metal into China declined to 396,712 metric tonnes in May, down 9.1% from April and 6.1% year-on-year.

Capital Economics offered a bleak outlook, believing that prices could fall on the back of China cooling its growth.

"We think inflationary pressures are subsiding in China and there is little evidence of any bubble in broad-based measures of house prices. But that very fact that China's economy is cooling is itself bad news for copper prices. There are tentative signs that domestic output of copper is declining on expectations of weaker demand.

"We think the combination of softer demand in China, investor caution and dollar strength is likely to drag the price of copper down further."

It sees a further decline in the price to $5,000 per tonne by the end of this year.

And it's not just China that is heightening fears for the state of the copper market. Concerns over the state of the eurozone and US economic recovery have also been playing on investor's minds.

Comments from the Federal Reserve that economic recovery in the US remained subdued has done little to help its cause, while fears that other European countries will follow Greece's doomed path, with Hungary likely to be the next one to go, have caused jitters in the market.

The result is reduced risk appetite across the board, heightened by the effect of the strengthening dollar on commodity prices.

John Meyer, metals analyst at Fairfax, says: "Copper prices look likely to trend lower in the short-term as investors and consumers hold back from buying metal. Expected softer eurozone demand, faltering US recovery and a clampdown of excessive property in China is of concern.

"Funds want to see a clearer direction and pitcture emerge for copper before buying back in," he adds.

Despite a spate of good data, investors remain by and large cautious of the the eurozone's comeback and remain uncertain about the long-term survival of the euro which just last week plunged to a four-year low against the dollar.

However, David Wilson, metals analyst at Societe Generale, believes the fears over China have been overdone and while the price of copper will no doubt be volatile over the near term, its overall trend should be upwards.

"For copper, China remains an unerringly bullish influence, which is not really surprising given the countries relative lack of copper resources. China has made clear the need to rein in its property market, however this does not mean a slowdown in construction activity. The sector represents an important source of employment in China so we see little chance of a significant slowdown in this sector."

He added that the property collapse following the country's previous tightening in 2008 will be at the forefront of authorities' minds.

Societe Generale estimates that China will account for 40% of first use base metals consumption this year with Chinese refined copper consumption to reach almost 6.6 million tonnes this year.

Goldman Sachs takes a similarly bullish stance, despite the recent downturn. In a note on copper, the bank says that while concerns of economic slowdown are driving commodity prices lower, real copper demand in China remains strong and are likely to bounce back in the latter half of the year.

"Copper fundamentals are the best in the near-to medium-terms as the current pipeline of new supply will not be able to meet demand in the medium term. Longer term, new projects will require high prices to ensure sufficient return on capital."

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