Global equities and commodities have been rallying since the last quarter of 2012, following signs of global recovery and liquidity infusion by major central banks. Copper has been no exception.
Prices, currently around $8,250 on the London Metal Exchange have rallied 3.5 per cent this year. For more than one reason, we feel this rally in copper prices has more steam left. China, the largest metals consumer, has managed sustained economic recovery. China’s demand for copper is expected to grow 10-11 per cent and global demand is expected to grow 3.5-4 per cent in 2013. More, the gradual recovery in the US, led by its housing market and household savings rate, are only expected to gain momentum, while the contracting Euro zone economy has seen increasing consumer sentiment in the past six months.
Investors who believe the global economy has hit a bottom have piled into base metals exchange-traded funds (ETFs). Over the last few years, copper has gained a prominent place among risky assets, along with silver. Assets in ETF Securities' physical copper fund have nearly tripled to $47.5 million in the two weeks to January 24. At present, the ETF Securities physical copper fund has 6,013 tonnes of in storage. The recent SEC approval to JP Morgan’s physical-backed copper ETF has the potential to become very large, as it can store LME copper worth $499.8 million, equivalent to about 62,000 tonnes at $8,000 each. More, there are other ETFs waiting in the wings for SEC approval. This leads us to believe the investment-driven demand for copper is likely to strengthen the current uptrend.
Despite all these bullish signs, a revival in mining supply has held the rally in check. We are in the middle of the quarterly reporting season. BHP Billiton, Rio Tinto, Antofagasta, Southern Copper, Anglo American and First Quantum have all reported higher mined copper production for both the fourth quarter and full-year 2012 periods, unlike 2011 and 2010. Having said that, copper production problems and ore downgrades are never going to disappear completely. However, compared to the previous years, copper supply looks more firm this time round. Proof is the 10 per cent jump in this year's treatment and refining terms and forward markets currently in Contango since November 2012, highlighting the increasing supplies, which are expected to continue, going further in the first quarter.
Stocks at major warehouses (LME, Shanghai) have been increasing since July 2012, which should continue till March 2013, as part of a restocking process. However, this should be subdued after the Chinese Lunar Year due to the high stocks-to-use ratio, is now at five. Inventories have hit 0.64 million tonnes as of January 30, levels not seen in 2012. With more supplies coming in, we expect a surplus of 0.2 million tonnes by the end of FY13. However, the upswing in global PMIs, especially China, suggests recovery expectations are likely to support prices in the short term, leading the rally towards $8,700, though rising supplies (assuming no disruptions) and higher inventories could restrict the upside
Technically, as long as prices sustain above $8,200, these could rally to $8,450. The next hurdle could be at $8,780. However, on a break below $8,200, there could be support at around $7,980 and $7,760.
The author is executive director, Anand Rathi Commodities
