Copper seen bullish in near term

Huge demand from China is the main reason behind the surge in price, say analysts

Strong chinese demand vis-à-vis depleting stocks are pulling up copper prices towards the crucial $5,000 a tonne level on London Metal Exchange, analysts said.

The red metal, though in a heavily overbought position and despite current gains is witnessing, as Ingrid Sternby, Barclays Capital's metals analyst suggest, "nervous bullishness".

"While the stair-step advance has resumed, with the uptrend targeting $5000 (a tonne) in the process, the extreme readings in sentiment suggest that the trend is becoming increasingly overextended. Given the poor relative strength showings, there are other precious metals that provide more favourable opportunities," said Sternby in a Barclays technical note.

Market is expecting a huge correction soon after the LME copper three-month futures touch $5,000, said a Mumbai-based trader. Wednesday, the contract ended at $4,873 a tonne and sees $4,953 mark as a huge resistance level.

Market players are also suggesting that as cool off in copper prices begin, a subsequent rise in prices of other base metals (led by zinc and tin) will become imminent, following a demand-supply mismatch of largely all metals.

"The ISM manufacturing index component showed strength in the export orders and the backlog orders. The widening difference between Shanghai exchange and LME the depleting stock is expected to keep the counter a tad strong in the coming session," said S Kannan, an analyst with Sharekhan Commodities.

After touching a seventeen-year high of $4,478 a tonne at the end of 2005, LME spot copper prices are hovering around $4,949 a tonne. The three-month contract is also at fresh high of $4,873 a tonne. Boom in construction, telecom and cable businesses are responsible for rising prices of red metal.

Further, the steady drift in copper's cash-to-three month backwardation which has now fallen to 85/90 down from 122/132 last week, said William Adams, metals analyst with Basemetals.com.

"This suggests less tightness in the nearby months, which given the steady rise in stocks over the past few months is not so surprising. In addition, the high prices are seeing a physical premiums ease with US premiums around 5.5-6 cents/lb to down from 6-6.5c/lb," Adams added in an emailed note.

Despite India remaining a net exporter of copper, the market has witnessed price rise in line with LME. Further, copper smelters in India are witnessing expansions and this is likely to strengthen India's position in the global market over the next 2-3 years.

However, adding to the global industry woes are low supplies of red metal and forecasts of lower mine output. Despite rising prices, globally, investment into copper mining has remained minuscule.

According to Sternby, "New mine projects have long gestation period owing to rising production costs such as energy. Besides, an increasing number of strikes have lead to disruptions in supplies".

"Prices were also helped by more disappointing production reports by major producers. Europe's largest copper producer, KGHM, said its output would increase only slightly this year. Copper producer Phelps Dodge in the US, meanwhile, reported a 64 per cent decline in Q4 profits partly due to production and sales shortfalls. Its copper output fell 11 per cent, primarily because of problems getting metal from rock that was harder than expected at its Candelaria mine in Chile. Further, the cost of products sold jumped by US$1bn last year with energy expenses up 23 per cent, and freight and treatment charges 38 per cent higher," said another Barclays note, summing up the situation of some of the top global players.

Copper inventories, as of Wednesday, totalled 146,081 tonne, which merely will meet three days of global consumption, said another Mumbai-based analyst.