Behind copper’s current surge…

Copper prices are on the upswing on the back of the Chinese State Reserve Bureau buying 200,000 tonnes of the metal in the last couple of weeks.

After having slipped to a four-year low of $6,321 a tonne on March 19, copper prices have bounced back, gaining over seven per cent since then. On Tuesday, copper for delivery in July was quoted at $6,745.50.

In the domestic futures market, copper hasn’t seen that much of a surge, rising to ₹419.50 a kg from ₹403 during the same period.

The general view is that since the Chinese State Reserve Bureau has fixed a target of below $7,000 to buy copper, used in construction, cables, pipes and tubes, more purchases could be on cards. The stocks that the bureau has bought recently are expected to be moved to China in June after clearing old stocks.

While Australian website Macro blog reported that all but one of Chinese provinces have missed the growth target, the International Monetary Fund has said that the slowdown in China is “sharper than envisaged”. The IMF has, however, raised the outlook for economic growth in China to 7.5 per cent. At the same time, it has the pegged its growth projections for next year at 7.3 per cent, also higher than the initial projections.

The other factor that could drive copper will be data from the US. On Monday, the data showed that pending home sales rose to a three-year high in the US. Other data such as jobs and retail sales, besides the US Federal Reserve statement on the stimulus package could hold key to the metal’s progress.

China and the US are vital to copper’s fortunes since they are the top consumers. Non-farm employment is expected to improve, while payrolls are likely to surge since the US Government has made temporary recruitments for census work.

The third factor in support of copper is the London court’s ruling striking down the London Metal Exchange’s revamp plan on warehouses. The LME planned to revamp the storages from April 1 since it was taking months for deliveries. However, the court has struck down the proposal on the grounds that the exchange had not held proper consultations with producers such as Rusal, world’s largest aluminium producer.

Copper, which is used in a wide range of products, is sensitive to shifts in economic data. The US is the world’s second-largest consumer of the red metal.

In China, the State Reserve Bureau is reported to have mopped up an additional 350,000 tonnes from banks, held against finance deals, at a cheaper rate. The suspicion is that the bureau could be a net buyer of 300,000 tonnes and the purchase could have been made for the military.

The Chinese purchase could have an effect on the market surplus. This year, refined copper is projected to be in surplus globally in view of higher mine production last year. Besides, problems in Indonesia, which has banned export of ores, are also likely to cut the anticipated surplus by over 50,000 tonnes.

A Reuters poll showed the median of analysts’ expectation of copper surplus around 228,000 tonnes (down from 260,000 tonnes in January), but fears are that the surplus could shrink. Besides, stocks with various players are also likely to decline.

It is for these reasons that the copper is seen as a value-pick under current circumstances.

According to Morgan Stanley, there is compelling evidence of an improvement in demand for copper in China metal.

The current price weakness is due to investor concerns over China, but copper will be the prime beneficiary if policy-makers respond to worsening macro data.