Copper's recent price surge may stop short of all-time highs posted in 2006, but much depends on demand from emerging markets like China and India. The most notable difference between the two rallies has been a shift in the market's fundamental backdrop - turning from supply-driven in 2006 to more demand-based this year, analysts said.
"Last year the rise in prices was really focused on large supply disruptions ... mainly due to strike activity, but this (rally) is more demand-focused and there is concern over supply not catching up, but there is not the same shocks or unanticipated supply disruptions that really threw the market into record highs," said Catherine Virga, a base metals analyst with CPM Group in New York.
At this time last year, dwindling copper stockpiles, robust demand, and supply constraints at major mines contributed to spark an aggressive flow of investment fund money into the market, setting the stage for the red metals's surge to all-time record levels - $4.16 a lb in the United States and $8,800 a tonne in London.
This year, a rebound in Chinese demand has provided the impetus for copper's reversal from a recent bottom set in early February. Jim Rogers, a commodities investment guru, believed the best way to play the Chinese market was through commodities, and the materials they will have to buy, like copper. "I wouldn't buy copper today just because it's run straight up for five months, but I wouldn't sell copper under any circumstances," Rogers said.
Emerging Asia, driven by fast-growing giants China and India, faces a "very positive" near-term economic growth outlook and should be able to withstand a US slowdown, the International Monetary Fund said on Wednesday.
The IMF forecast that emerging Asia as a whole would grow by 8.4 percent in 2007 and 8.0 percent in 2008, with the economic growth of the regional locomotive, China, projected at 10 percent this year and 9.5 percent in 2008. India is expected to expand by 8.5 percent this year and 7.8 percent in 2008, according to the outlook.
Rising exchange stockpiles and weaker demand were seen behind the heavy liquidation in copper prices during the last half of 2006, thus creating a considerable number of short positions in the market.
Since the start of the year, a rebound in Chinese demand was seen influencing non-commercial players or speculators to cover those bearish bets, thus fuelling the turnaround in prices.
"On top of all of that, you obviously have a very supportive investor positioning backdrop because the community was so aggressively short it was very unlikely they were going to add to that position," said Michael Lewis, global head of commodities with Deutsche Bank. "What's been happening is they have been closing those net positions, and buying back copper."
Speculators held their largest net short position in nearly five years at 21,898 contracts in early February, at the same time US copper futures were trading near ten-month lows at $2.40 a lb.
Dennis Gartman, independent analyst and author of the Gartman Letter, however, stood by his prediction last year that he would not see $4.00/lb copper again in his lifetime.