Chicago -- (Kitco News) --Copper futures prices are trading at their highest levels in two months in London and New York, with tightening spreads, a lower dollar and falling warehouse stocks lifting prices.
The strength in copper is fanning across all base metals, from aluminum to zinc. Analysts cited several reasons for the gains: global demand recovery, a fall in mine supplies and to an extent, arbitrage between different exchanges. Generally positive earnings reports by miners and the overall equities market is also giving copper prices a lift.
At 1 p.m. ET London Metal Exchange copper was around $6,790 a metric ton and Comex September copper prices were up 7.3 cents to $3.1660 a pound.
The gains in copper and in turn other base metals such as nickel and aluminum are coming at odds with the recent sentiment downturn in the outlook for the U.S. and other parts of the global economy. Just this week new home starts in the U.S. fell to an eight-month low as a tax credit to buy homes ended. China is making attempts to curb real estate investments and concerns about Europes long-term growth because of the debt problems there have made some market watchers worried about deflation in the coming months. That would pressure prices for all assets. Even Federal Reserve Chairman Ben Bernanke expressed concern in comments to Congress on Wednesday that the U.S. economic outlook was unusually uncertain and offered no plans for further stimulus. Prices across all markets slumped on those words, but on Thursday copper shook off that malaise.
Dr. Copper appears to be telling the world the economy is growing. The red metal earned that nickname as it is called the only metal with a Ph.D in economics because of its heavy industrial use.
Copper has been saying that for a while, said Bill ONeill, principal with LOGIC Advisors. We get very parochial here in the U.S., where we only look at U.S. data. But globally its not as bad. Theres demand for industrial commodities like crude oil, like copper.
In China, he said, theres strong demand even as there are attempts to cool down the economy.
Barclays Capital said the recovery in global demand is one of the drivers of price strength, even though the pace of demand recovery has slowed. The bank said in a research note Thursday that demand volumes for most metals are back above pre-downturn levels. For some metals, such as copper, and to a lesser extent nickel, this recovery in demand has been outpacing the recovery in production resulting in market deficits and the need to draw inventory. Further exacerbating supply conditions is the tightness in scrap, particularly for copper and aluminum, which is leading to more primary metal being consumed as a substitute, the bank said.
Thursday was the 25th day of a drop in LME warehouse stocks, ONeill said. Spreads in London are good indication that there is very solid demand for copper, he said.
The market is talking about the amount of arbitrage happening between the various base metals futures exchanges, which is leading to backwardation where the nearby prices are higher than deferred. A sharp backwardation on the Shanghai exchange for copper has lead to Chinese buying of LME copper, which is lifting Asian warrant premiums and is probably why theres a rise in deliveries out of Asian LME warehouses, the bank said.
Stocks of base metals in approved warehouses are falling in general, but before investors try to extrapolate strong demand for copper to all base metals, Barclays points out theyre not all made of the same stuff.
Financial deals in aluminum have caused spread to tighten, too, they said. But thats where the similarities between tight copper and aluminum spreads end. In this respect the perceived tightness in aluminum and zinc is synthetic, in our view, with ample inventories of both these metals in LME warehouses and both markets in surplus. For copper, tin in particular and to a lesser degree lead and nickel, we think these tighter spreads are more reflective of a tight market balance and potential for further spread tightening, the bank said.
Also supportive for base metals prices are the positive earnings reports from various miners. Aluminum giant Alcoa kicked things off last week with a stronger-than-expected performance. On Wednesday Freeport McMoRan, the largest publicly listed copper producer, reported a strong revival in demand and full order books yesterday.
Tucked into the positive earnings news were comments by Freeport and BHP Billiton about falling mine supplies. Freeport McMoRan also said second quarter results showed a 13% year over year decline in copper mine output, while BHP Billitons second quarter production report showed an 11% year over year decline in copper mine production, Barclays said. That lower supply could support prices.
Fundamentals are lending support, and technical charts are adding to buoy prices. Standard Chartered bank said in a research note this week that with LME coppers move above $6,880 a metric ton is price-positive on technical charts, with an inverse head and shoulders pattern unfolding. The first resistance is $7,043 and if the pattern holds, it could suggest a move to $7,800. On the downside, if support at $6,310 is broken, the next support is $6,045. They caution, though, that moving averages need to turn bullish.
Barclays is bullish on copper longer-term, too. They have an average price in 2011 of $7,753 compared to an average of $6,752 in 2010. Copper mine production growth is likely to struggle, which suggests there will have to be large draws in metal inventories to keep up with even a modest rate of demand growth. As such, we see the potential for copper prices to reach a new record high, they said.
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