China holds the futures key to copper party

NEW DELHI: Is the party over for copper? The answer depends on whom you ask. Copper fell to a five-month low last week. The bears are pointing towards data that shows that supply might be finally catching up with supply.

But traders with long positions say China will resume buying with gusto now that copper has become affordable once again.

The International Copper Study Group (ICSG), in its latest report, showed that copper output in the first eight months of the year stood at 11.4m tonnes, while the consumption stood around 11.3m tonnes leaving the market into surplus of 0.1m tonnes.

The recent rise in stock levels has also been weighing down prices. According to ICSG, at the end of October ‘06, copper stocks held at the major metal exchanges (LME, Comex, SHFE) totalled 191,058 tonnes, an increase of 22,164 tonnes from stocks held at the end of September and 34,807 tonnes from those held at the end of December ‘05. Stocks were up at all three exchanges (SHFE, LME and Comex warehouses).

The total world refined production increased by 5.9% in the first eight months of ‘06 compared with that of the same period of ‘05. Moreover, primary production was up by 4.9% and secondary production (from scrap) was up by 13%.
Refined capacity utilisation averaged 83.2%, up from 80.4% in the same period of ‘05. With the exception of Chile (-1.6%), all major producing countries increased their production China (21%), Japan (11%), the US (5.5%), Russia (1.8%) and India (30%).

The bulls, however, are looking expectantly at China returning once again to the market. High copper prices, which hit a record of $8,800/tonne in May, had kept China off the world copper market for months. Imports of copper, including semi-finished products, dropped 22.4% between January and October as China relied on its own stockpiles. But this may soon change. Stockpiles of copper in Shanghai Futures Exchange (SHFE) warehouses declined 10% last week to a six-and-a-half month low of 31,576 tonnes.

“With copper prices falling and domestic stockpiles declining, China could perhaps start buying again,” said a Mumbai-based trader. Traders are simultaneously keeping an eye on labour negotiations at the Codelco Norte division of Chile’s Codelco (the world’s number one copper producer) where the biggest trade union said it was waiting to receive a preliminary offer from the company before deciding if it would participate in early talks.

Traders are also upbeat about an announcement this week that Freeport-McMoRan Copper & Gold will buy fellow copper producer Phelps Dodge Corp for $25.9bn in the biggest mining take-over ever.

Meanwhile, copper prices are slowly creeping up. On Tuesday, copper prices rose on LME mainly due to short covering. Technical buying and positions squaring ahead of the US Thanksgiving weekend. In India, the positive international trend helped copper to end higher. But traders are wary.