Metals & Mining

Fri, 01/20/2012 - 15:51

Shanghai. January 20. INTERFAX-CHINA - Copper's recovery in the run-up to the Chinese New Year is unlikely to last and prices are set to plunge later in the year amid ongoing weaknesses in the global economy.

After hitting a yearly high of $10,180 in February 2011, prices touched a low of $7,200 per ton towards year-end as investors' concerns over the eurozone debt crisis and a hard-landing in China intensified.

The recent rally has been helped by expectations that Beijing may reduce reserve requirement ratios for banks to increase lending as China's economy slows. Premier Wen Jiabao also announced plans to support Chinese stock markets last week and increase loans to small and medium-sized businesses, which will encourage the economy in the first quarter.

Large Chinese smelters may have bought futures at around $7,000 per ton in 2011, the bottom of the year's price range, to hedge against weakening prices in 2012. This could give further buoyancy to copper prices in the near-term.

But looking further ahead, the problems facing the global economy are markedly more complex than those of the 2008 financial crisis. With the U.S. recovering slowly and employment rising, the Federal Reserve will be reluctant to embark on a third round of quantitative easing. And Beijing has made clear its commitment to taming inflation in consumer and real estate prices.

Europe meanwhile is struggling to put together a bail-out plan without external help - a viable rescue package could require more than €2 trillion.

Weak demand in China and a strong U.S. dollar will push investors away from copper in the coming year. The U.S. Dollar Index rebounded past 80 in December, and will continue to gain support as confidence in the currency returns and the euro and renminbi depreciate. The renminbi has weakened in recent weeks due to outflows of hot money, signaling dark times ahead for China's capital markets.

Though China's copper imports hit a 21-month high of 510,000 tons in December, the brisk trade has done little to help prices. Inbound shipments have been boosted by arbitrage buying between London and Shanghai, and unlike the second half (H2) of 2010 there has been scant interest in purchasing for appreciation.

China's real consumption meanwhile weakened in the last half and the outlook for the year ahead looks troubled, with slowdowns expected in key downstream industries such as the real estate, automobile, railway and electronics sectors.

Furthermore, soft physical demand and increasing imports have swollen inventories in recent months. The resulting supply surplus has put pressure on prices and pushed up backwardation - a market condition wherein the price of forwards or futures contracts trade below the expected spot price at contract maturity.

Backwardation has been exacerbated by seasonal factors as China's smelters prepare extra inventory approaching Chinese New Year, making for a foreboding reading on the future health of the market.

By Zhang Xi, copper analyst with Shandong Province-based Luzheng Futures

Editors note: By publishing the above guest column, Interfax-China does not intend to endorse the author's views. Rather, the guest column is reserved for professionals who wish to share independent opinions on topics related to industry.