The Hindu Business Line : Copper in surplus; prices likely to fall

Signs of bearishness
Copper traded 30 per cent below the May highs during the year-end.
Index re-weighting is unlikely to have a significant impact

Mumbai , Jan. 8

For the base metals complex, it has been an extremely weak start to the New Year. Copper led the slide, falling by over 11 per cent last week, dragging many other metals down.

Easing signs

Although the fall was extremely savage, analysts believe, it was just the continuation of the trend that started several months earlier.

While all other base metals rebounded in the second half of the year, and ended the year trading close to May highs, copper was trading around 30 per cent below the May highs, reflecting signs of physical market easing (lower premiums and rising stocks).

A minor factor adding to the bearishness in metals markets is the re-weighting of commodity indices that will commence at the beginning of thw week and will last until January 15. For base metals, it is the impact of the DJAIG commodity index re-weighting that is of significance.

Re-weighting unlikely

However, index re-weighting is unlikely to have a significant impact on metals markets in the coming weeks as the process is transparent and volumes relatively small.

After a savage sell-off, what should one expect next for copper? In the very near term, prices could easily continue to drift down to around $5,000 a tonne ($ 2.27/lb) over the next few weeks.

At the same time, there will inevitably be a bounce-back in prices; and fundamental trigger for this could be a pick-up in physical buying from late February onwards.

One can expect to see a rebound in Chinese demand after Chinese New year, and this, combined with the seasonal strength in demand elsewhere over the February-April period, could bring a pause in inventory build-up and a resulting bounce back in prices, experts asserted.

Nevertheless, for 2007 as a whole, copper could be in surplus to the extent of approximately 2.5-lakh tonnes and for this reason, prices could come under downward pressure.

Supply shock

It would take an extreme supply shock to see prices getting back anywhere near their 2005 highs - even $6,600 ($3/lb) is starting to look a long way away, experts said, adding that the settlement of a new labour contract at Codelco Norte just before Christmas was a watershed for the copper market, removing one of the major concerns about being short copper.