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Copper prices soar to near two-year high

COPPER prices have hit their highest levels since mid-2008, boosted by a more-stable outlook for Greece and optimism about the global economic outlook, notably growth prospects in China.

Improved sentiment in recent days and growing risk appetite among investors, in part owing to steps Greece has taken to resolve its fiscal woes, also helped push the industrial metal to key technical levels that triggered additional pre-placed buy orders, market participants said.

Copper hit a 19-month high of $US7878 a tonne in benchmark three-month trading overnight on the London Metal Exchange, while the most-active May copper futures contract on the New York Mercantile Exchange hit its highest level since July 2008.

Despite the gains, many market participants are sceptical that the rally is justified by fundamentals. The metal, which is used in a variety of industrial applications, is particularly sensitive to economic cycles, and the outlook for recovery remains uncertain.

“Whilst the bulls in us are pacified by the return (of copper) to higher levels, we remain unconvinced that the rate of recovery is either sufficient yet, or robust enough to sustain these gains and thus prices remain fragile and vulnerable to correction,” said Alex Heath, head of base metals at RBC Capital Markets.

KEY COMMODITY PRICES: gold, oil, base metals, livestock and wheat

John Gross, an independent metals-industry consultant in Exeter, Rhode Island, said much of the latest move can be attributed to technical factors. Pre-placed buy orders helped May copper break resistance just shy of $US3.50 a pound on Monday, and the contract tested more-important resistance around $US3.55, its January high, overnight.

“In my mind, there has been no fundamental justification for the move,” Mr Gross said.

May copper was up US2.3 cents, or 0.7 per cent, at $US3.5585 a pound in recent trading. Thinly traded nearby April copper was up US2.2 cents, or 0.6 per cent, at $US3.55. Three-month copper in London was up 0.9 per cent, at $US7842

Copper prices more than doubled in 2009 as economic prospects improved and investors sought out riskier assets in an environment of ultra-low interest rates.

Prices fell sharply in January amid concerns that monetary policy tightening in China could crimp demand, but recovered most of those losses in the following month.

In recent weeks, prices have moved in a narrow range as market participants awaited news on a bailout for Greece. Positive steps by Greece, including a standby credit facility and a €5 billion ($7.3bn) debt offering, helped boost market sentiment in recent days.

On the face of it, the global outlook does seem to be improving. Concerns about Greece have receded — even as the country paid a higher premium for the debt than it would have liked –and a handful of economic indicators have come in better than expected recently.

Copper investors are taking the most comfort from the outlook for growth in China, the world’s largest consumer of commodities. The head of macro-economic research at the State Council Development Research Centre said China’s annual growth will reach 12 per cent this quarter. This comes on the heels of a World Bank report upping its annual forecast for growth in China to 9.5 per cent from 8.7 per cent.

Yet it is this very growth that is concerning market bears. Increasing fears of soaring Chinese inflation and an earlier-than-anticipated rate hike is putting at risk the same copper price gains China helped to create.

Michael Lewis, head of global commodities research at Deutsche Bank, said industrial metals markets need to be on alert for further measures to rein in the Chinese economy.

“Monetary tightening measures will encourage a slowdown in domestic loan growth, which will lead to a price correction across the industrial metals complex,” he said, adding copper prices “have entered overbought territory.”

If slowing Chinese demand growth proves to be bad news, it will only be heightened by the massive build in copper inventories in warehouses around the world. Although LME stocks have fallen slightly from their six-and-a-half year highs in February they remain elevated, while estimates for metal held outside the reporting system are multiple times higher.

Stocks evidence is anecdotal, however, creating an uncertainty that is leaving many unwilling to go short in case the information proves wrong, copper enters a deficit and prices chart a straight line higher…read more at The Australian