Copper prices are set to rise on Chinese demand and a spate of short positions even though markets suffered a case of nerves this week due to economic growth fears.
Copper for three-month delivery on the London Metal Exchange tumbled to a nine-month low of $5,250 a tonne at the beginning of February and recovered to a two-month high of $6,374 last Monday, a gain of more than 20 percent.
Since then the metal, used in the construction, transport and power industries, has been knocked back to $6,100 as markets fretted about economic slowdown in China and falling demand. But analysts and fund managers see the losses as only a blip in an otherwise upward trend.
Crucial behind the rise since early February is the squaring of short - bets on lower prices in the future - copper positions in London, New York and Shanghai.
Analysts estimate the overall short position in January totalled around one million tonnes, with about 200,000 tonnes in New York and the remainder on the London Metal Exchange and the Shanghai Metal Exchange.
Much of it is still waiting to be unwound. "If the shorts wanted to cover (buy back) their positions, they won't be able to do it very easily," said Chris Bouckley, a founder at hedge fund firm Caliburn Capital Partners.
China's State Reserves Bureau is estimated to have offloaded about 700,000 tonnes of copper over the past four years. Of that more than one-third is thought to have been sold last year. Replenishing those stocks over the next few months is expected to create a scramble for copper.
"For 2007, we have assumed a steady restocking in China of about 150,000-200,000 tonnes," US investment bank Morgan Stanley said in a research note. A major psychological influence has been the housing market slowdown in the United States, which will to an extent determine the direction of copper prices.
Chinese growth may slow, but economists expect it will still be among the highest in the world at around 10 percent. "If the US housing market gets worse instead of flattening out or getting better that will have an impact at the margin, said Klaus Rehaag, executive vice president at commodity hedge fund Gardner Finance.
For now, news that China's imports of refined copper jumped 86.3 percent to 131,851 tonnes in January compared with a year earlier has reinforced that view of strong demand. Also underpinning the market is underinvestment in new mines, low stocks and a lack of major new finds. "A large proportion of growth in new mine capacity is likely to be concentrated in sub-Saharan Africa, Mongolia, Pakistan and other politically sensitive and geographically remote regions," Morgan Stanley said.
The bank added that limited infrastructure in these regions would lead to substantially higher costs and project risk.
Bearing all that in mind, what are the chances of a copper surplus this year given that the market is finely balanced - supply and demand were roughly equal at around 17 million tonnes last year.
Currently the consensus is for a surplus around 200,000 tonnes, but many think a deficit is likely.
Low LME stocks at around 210,000 tonnes - only about 4 and half days global consumption - are also a problem. "With our forecasts of rising Chinese imports and increased US activity in (the second half of 2007), we forecast copper inventories to remain tight," Citigroup said in a research note.
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