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Copper Expected To Be Range-Bound Or Higher Into Year-End

(Kitco News) - Analysts look for copper prices to be sideways to higher through the remainder of 2011, supported by an ongoing supply deficit and an expected re-stocking phase in China. Nevertheless, some say the upside is likely to be constrained by worries about economic growth, which in turn could limit demand for the industrial commodity in much of the world. Copper, along with other base metals, sold off sharply from the early August highs with equities on worries about the economy. Since, copper has bounced back and rose on the London Metal Exchange Wednesday for the seventh straight day, before the winning streak finally ended Thursday. Three-months copper closed in London at $9,145 a metric ton. In mid-afternoon Comex trading, the December futures were at $4.15 a pound. "Our view is copper will move higher into 2012, but it's going to be very choppy," said Bart Melek, vice president and head of commodities strategy with TD Securities. He looks for copper to average $9,480 a metric ton and $4.30 a pound in the fourth quarter. "I suspect until we get a better idea of what is happening with the economy and we see more certainty, it is going to be choppy-up and down, up and down. "But in the final analysis, I think copper demand continues to be strong. I don't think China is going to have a sharp drop in activity." China has become the world's largest consumer of the red metal. Melek's firm looks for China's economic growth to continue at a pace of 8% to 9% over the next couple of years, which he said implies "robust" growth in copper demand. Chinese officials have been tightening monetary policy to stem inflationary pressures, but this may be about to run its course due to some weakening in manufacturing export data, Melek said. For instance, while China's official manufacturing Purchasing Managers Index rose in August, the portion of the report for new export orders fell to 48.3 from 50.4 in July. "We suspect that the Chinese government is going to be very careful trying to slow things down for fear of overdoing it," Melek said. China went through a period in which it apparently drew down copper stockpiles, but some analysts look for this to reverse. "I think prices are probably going to move up further in the fourth quarter because China-after working down inventories in late 2010 and first five months of 2011-probably will continue to buy more copper to re-stock," said Patricia Mohr, vice president with Scotiabank. In fact, this was already occurring last month, analysts said. A research report from Harbor Intelligence said a retreat to around $4 a pound prompted Chinese consumers to "aggressively enter the physical market to cover re-stocking needs." Further, the arbitrage between Shanghai and London copper prices has favored metal on the LME lately, analysts said. "That really encourages buyers in China to buy on the LME, and it will show up in the import statistics as we move through the fourth quarter," Mohr said. "I would expect, despite the fact that China continues to tighten monetary policy, their buying will be fairly strong in the fourth quarter." Harbor said the so-called VIX, or fear, index is retreating from last month's highs to more-normal levels. And, Harbor said, funds-which have significantly pared copper positions in recent weeks-could be about to re-enter and give the market a boost. Harbor looks for a return to $4.50-a-pound copper in the coming weeks. "Funds could be waiting (for) an official technical signal to buy copper again," Harbor said. "The buying phase could be aggressive in coming weeks as there is substantial ammo on the sidelines." Other analysts look for sideways action for the remainder of the year. MF Global analyst Edward Meir lists a potential range of $8,300-$8,400 on the downside and $9,400-$9,500 on the upside. Michael Gross, broker and futures analyst with OptionSellers.com, suspects Comex December copper will remain within its August range-which was a high of $4.55 on Aug. 1 and a low of $3.8420 on Aug. 9. "I think we will be in a bit of a sideways trading range for the balance of the fourth months in this year," Meir said. "The market is in a deficit, and that keep away a big collapse." Nevertheless, economic conditions limit the upside, he said. "The fact of the matter is we're in a soft patch globally growth-wise," Meir said. "I don't think that is going to be over any time soon. It could take another four to six months before we get out of this." Gross pointed out that copper tends to be affected by macroeconomic factors more than most commodities. Recently, he said, markets collectively tended to be bearish on the global economy, although he also doubts "things are as bad" as investors think. "We're not looking for a washout in copper prices," Gross said, pointing out that the general consensus is for the Federal Reserve and/or government will undertake some kind of further stimulus programs. Analysts Expect 2011 Supply Deficit For Copper Market Most analysts still look for a copper-supply deficit this year as demand in China and other developing nations holds up but mining supply doesn't. The copper industry is facing a number of supply constraints, observers said. This is occurring even though, as Mohr pointed out, copper prices are "extremely lucrative" for mining companies. The National Statistics Institute in Chile, the world's largest-producing nation, this week reported an 18% year-on-year drop in copper output during July. Analysts with Barclays Capital cited declines in both concentrate and cathode output following weather-related disruptions and a two-week strike at Escondida, the world's largest copper mine. Further, output at the mine had already been falling due to declining ore grades. Also, operators of Chile's Collahuasi mine have said they expect lower output than 2010. And, a union is threatening a strike at Freeport McMoRan Copper & Gold's giant Grasberg mine in Indonesia. Melek looks for a copper supply/demand deficit of around 400,000 metric tons this year, while Harbor Intelligence this week revised its projected deficit to 333,000 tons. Most forecasts are in the range of a 300,000 to 500,000 deficit, said Meir. Copper Market To Keep Tabs On Obama Jobs Plan A speech by President Obama next week, when he is expected to outline jobs proposals, could play a role in copper's fortunes, analysts said. "We think the stock market will probably like that, and we think copper might like it as well," Gross said. "Any type of stimulus or program, at least in the short term, would probably be bullish for copper." However, markets could become "disgusted" if there is partisan "bickering" over a jobs bill, Meir said. "You'll start to see weakness again in the stock market, which could follow through into the commodity markets." Meanwhile, Europe continues to grapple with sovereign-debt issues, which could pressure commodities. One factor that could ultimately lift copper would be a sell-off in crude oil, Meir said. "That would be a big shot in the arm for growth, because it acts like a tax cut," he said. "It will allow many of these central banks to lower their interest rates instead of increasing their rates." By Allen Sykora of Kitco News; asykora@kitco.com

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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