Categories: Base Metals
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Copper Market's Problems Are Starting to Pile Up Quietly

There is no shortage of buyers for copper right now. But it takes more than that to sustain a rally.

Copper futures bounced into 2012, racking up a 16% gain over the first six weeks to trade near $4 a pound amid expectations that China, the world's largest consumer of the industrial metal, would continue its December copper buying binge into the New Year.

But while Chinese import figures show copper is entering the country, the metal isn't necessarily being put to use. Copper inventories at the Shanghai Futures Exchange, the country's main metals trading hub, have hit a record 221,487 metric tons. Analysts at Standard Bank estimate that copper stored in bonded warehouses, which don't report their inventory levels, has also risen to about 400,000 metric tons from less than 200,000 last October.

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Bloomberg News

Copper pipes at a Shanghai store

Chinese manufacturers, who consume about 40% of the world's copper output, are in a sour mood about the domestic economy thanks to Beijing's tight credit policies. Even though these appear to be loosening now, China's manufacturing activity has been contracting for four straight months, according to the February reading of the HSBC Purchasing Managers' Index. Meanwhile, orders from China's largest trading partner, Europe, have been in decline due to the region's debt crisis and slide into recession.

Some of copper's gains were fueled by hopes of a third round of quantitative easing by the Federal Reserve and the European Central Bank's extension of hundreds of billions of dollars of cheap loans to banks. But the ECB's efforts come in the face of the region's dismal economic prospects. Meanwhile, expectations for QE3 have receded: In The Wall Street Journal's February economic forecasting survey, only 36% of respondents saw QE3 happening this year, down from 42% in January.
 
 
[COPPERHERD] Bloomberg News


Conceivably, while demand looks uncertain, concerns about a supply shock could boost copper prices. This happened last year amid a string of lower production forecasts and the threat of copper getting tied up by metal-backed exchange-traded funds.

In contrast, this year's supply outlook is much brighter thanks to a strong pipeline of expansion projects. Chile's state-owned copper giant Codelco, which makes about 10% of the world's copper, is busy adding open-pit operations to its El Teniente mine and plans to develop underground operations at Chuquicamata, already the world's largest open pit mine.

Snowstorms and a fatal accident briefly halted work at Chile's Dona Ines de Collahuasi copper mine last month, while violence among employees briefly interrupted the return to normal operations at Freeport McMoRan Copper & Gold Inc.'s huge Grasberg mine in Indonesia. But these disruptions look minor compared to the disruptions expected early last year.

Absent such forces, the rise in copper futures look increasingly disconnected from underlying demand. The risk of a correction, which also happened last year, is rising.

Write to Tatyana Shumsky at tatyana.shumsky@dowjones.com

A version of this article appeared Mar. 3, 2012, on page B16 in some U.S. editions of The Wall Street Journal, with the headline: Copper Market's Problems Are Starting to Pile Up Quietly.

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