some retreat or consolidation expected, page-15

heres a warning for short term - jump back in later guys

(Kitco News) - London Metal Exchange copper prices, already buoyed lately by declining inventories, quantitative easing in the U.S. and a Chilean mine strike, pushed to record highs early Thursday following strong economic data out of China, the worlds largest copper consumer.

Analysts say there is potential for a correction lower in the coming weeks due to the year-end profit-taking that typically comes from funds, plus any eventual resolution of the Chilean strike. But then they expect further gains, with the global copper supply/demand balance forecast to move farther into deficit during 2011.

Three-months copper on the London Metal Exchange peaked at $8,966 a metric ton early Thursday, eclipsing the prior record of $8,940 from 2008. Most-active copper on the Comex division of the New York Mercantile Exchange topped $4 a pound this week for the first time in two years, with December peaking Thursday at $4.0835. However, New York prices remain below the Comex spot-month peak of $4.2725 hit in 2008.

Copper is benefitting from strong demand in emerging economies as nations such as China develop infrastructure. At the same time, supply constraints such as few new discoveries and declining ore grades are limiting the ability of producers to ramp up output. The balance for copper now is in deficit and likely to be in an even greater deficit in 2011, said Patricia Mohr, vice president with Scotiabank.

Copper also has risen lately with other commodities in the wake of last weeks announcement of further quantitative easing in the U.S., along with a softer tone in the U.S. dollar in recent weeks. The latest surge for the metal was kick-started overnight by solid economic data in China, which accounts for roughly one-third of the worlds copper consumption, said Leon Westgate, analyst with Standard Bank.

For October, China reported its Consumer Price Index rose 4.4%, industrial production climbed 13.1% and retail sales rose 18.6%. The industrial production reading, while strong, is down slightly from 13.3% growth in September. However, analysts said, the small pullback is probably due cutbacks to meet energy-reduction targets, plus a week-long holiday in October.

Meanwhile, a week-old strike at Chiles 535,000-metric-ton-per-year Collahuasi mine is underpinning copper, said Catherine Virga, analyst with CPM Group. There are conflicting reports on the impact. According to a daily research report from Barclays Capital, the union says output has fallen to 20% of normal levels, while the mine operator says output has not been disrupted.

Coppers strong fundamentals are reflected in declining warehouse stocks in recent months, said John Gross, an independent metals-industry consultant. At the end of last week, the combined stocks in the LME, Comex and Shanghai Futures Exchange warehouses stood at 540,976 metric tons, a 32% decline from the 793,184 peak in February.

Still, Gross added, much of the recent strength is the result of buying from speculators, who are in the drivers seat.

Copper Faces Potential For Correction On Year-End Profit-Taking

Copper has potential to rise more in the short term, with $9,000 the immediate target, Westgate said. But near-term direction will hinge in large part on activity from speculative funds, particularly if they opt to sell to book profits before year-end.

I expect further strength short term, although there is going to be some volatility as we head toward the holiday period, Westgate said.

Some say the recent increase in speculative activity makes it trickier to forecast the short- to medium-term direction.

Copper has been overbought for a protracted period of time, Gross said. But there is no market so overbought that it cant be more overbought. The trend right now is up, and thats what one really has to focus on, but be ready for a very significant correction that may occur at any time.

Some might argue that technical resistance emerged around $4 per pound in the past, he said. But then a number of other commodities, such as cotton, have plowed through their old highs to fresh records.

Further Gains Seen In 2011 As Supply/Demand Deficit Widens

For 2011, however, analysts describe themselves as bullish, particularly as China starts to rebuild its supplies.

I wouldnt at all surprised to see it touch $5 a pound at some point, Mohr said. Virga sees potential for a pullback to $8,000 a metric ton whenever the Collahuasi strike is settled. But this would likely trigger bargain hunting, with copper eventually threatening $10,000, she said.

Several analysts said China appears to be going through a period of de-stocking, or using up current supplies, of copper and other metals. A Tuesday report showed Chinese copper imports fell in October. However, Barclays said it doubts actual base-metals consumption is contracting, considering Chinas economy grew 10.3% in the third quarter.

Weve had several months of extended de-stocking in China, Virga said. Chinese consumers are shying away from the market at these price levels. But when they do return, were going to see their typically high seasonal demand in the first quarteramplified by the fact they have to re-stock. So thats going to be quite positive going into next year.

Furthermore, Virga said, copper supplies have not climbed lately due to supply constraints, even though inventories often rise in the third and fourth quarters due to seasonal factors. Meanwhile, demand typically picks up in the first few months of a new year ahead of the summer construction season. Further demand could come from any launch of physically backed copper exchange-traded products, following recent proposals submitted to the Securities and Exchange Commission.

Mohr said she looks for the dollar to eventually weaken further, which would add still more support to copper. A weak greenback tends to underpin commodities such as copper since it makes them cheaper for holders of other currencies, thus help demand.

Eventually, copper demand should get an additional boost whenever North American and Western European economies recover, Westgate said. Im bullish for 2011 but even more bullish for 2012.