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Strange things going on in copper market

Mysterious factors seem at play in the market for copper. Late last month it was revealed that one buyer was hoarding over half of the copper inventory at the London Metal Exchanges (LME). That could be up to 75 percent of the 355,750 metric tonnes in the LME listed warehouses, with a worth of an estimated $1.5 billion. The market value of the critical metal had soared 20% this year. It has shed some of the gains near the end of the week. What is driving these prices?

Copper hit an all-time peach of $ 9,044 a tonne on Wednesday. It has lost some lustre on currency flucations. Copper prices did maintain more value than gold and oil due to concerns about adequate supply.

LME data indicate that the amount of copper in warehouses declined from 555,075 tonnes in February this year to the current 355,750 tonnes. That is a 35 percent decline.

This supply shortage is likely to be exasperated by the launch of an Exchange Traded Fund (ETF) that was launched on Friday. It is expected to absorb almost half, or 185,000 tonnes. The UK-based Copper ETF will be backed by the actual storehouses of the metal, not just the shares in the copper producing companies. Prices are expected to become more volatile as a result.

The March forwards contracts for copper are showing some easing in the price spike, down to $ 8,880 per tonne. However, the inventory shortfall is expected to grow and be significant. Estimates for unfilled orders range between 200,000 and 400,000 tonnes.

UnitCredit Spa estimates the shortfall will be 1 million tonnes over the next two years. Analysts project the growing deficit will push prices to over $11,000 a tonne in 2013, around a 25 to 30 percent rise.

Part of the shortfall is due to a reduction in new mining operations after a slump in price earlier last decade. Also, on-going strikes at the mines in Chile continue to constrict supply.

The primary pressure on prices is a burgeoning demand for the metal that is critical for the electronics industry. Everything electronic runs on copper because of its conductivity. Integrated circuits to incandescent lightbulbs need copper. The metal is also important for infrastructure projects.

Investors are looking to China for indications on future prices for copper. Trade data reported on Friday signalled that a moderating demand should provide relief to the market pressure.

The Chinese have been working to slow their racing economy, which heavily utilises copper supplies. The leaders of the world's second largest economy have been accused of hoarding semi-precious and speciality metals that are the underpinnings of many technological components.

The Chinese have also been buying mountains in Chile that are richly ribbed by copper ore and other critical minerals.

Copper is the first metal than man melded in a meaningful way. It is a trade that goes back 10,000 years. Primatives found it was easy to form into sheets and shapes. It is also easily alloyed into bronze and brass. All of these resist corrosion including sea-spray.

Hence bronze and brass are still features of the marine industry. The emergence of the “Electronic Age” in the late 1800's prompted resurgence in the demand for the 'red metal'. Most of the copper today is being extracted from 100-year old mines.

Only a mere 100 years ago, the output of smelted copper first tipped a million tonnes a year, according to the Copper Development Association. Now, production is five times that.

It is an essential metal for many future orientated industries, such as solar heating, desalination plants, and other green engineering. Known global copper reserves of 1.24 trillion tonnes are thought to be sufficient for the projected demand in the long-run.

It is a matter of bringing it to the market economically. There are around 3 billion tonnes mined each year.

Copper requires more energy to extract than iron, zinc, or lead. Copper interestingly is energy-efficient to recycle. Premium-grade 'scrap' metal fetches 95 percent of market value. In the US, more is recycled than is mined domestically.

The US has had a long love-affair with copper. The Statue of Liberty is sheathed in copper and has weathered-well over the years. Its now greenish hue dominates the sky-line off the southern tip of Manhattan and greets and vessels entering the New York harbour.

Also, the US had long used copper in its penny since 1901. Pennies minted before 1982 were 95 percent copper. The US Mint has since moved to a zinc base of 97.5% and a copper coating. Copper pennies weigh 3.11 grams, whereas the zinc pennies weigh only 2.5 grams. Weigh it up. We should keep collecting those pennies.

Many investment firms are putting copper on their buy list. These firms include Goldman Sachs, Morgan Stanley, and Canaccord Capital, according to the Financial Post. The 10th Annual World Copper Conference will be held in Santiago Chile this Spring.

It is one of the most important conferences for copper industry executives and leading academics. It is sponsored by CRU Events out of London. More information is available at www.crugroup.com/EVENTS.

Patrice Horner holds an MBA in Finance, a FINRA Series 7 Licence, and is a Certified Financial Planner (CFP-US). Any opinions expressed in this article are not specific recommendations, nor endorsements of any productions. Individuals should consult with their banker, insurance agent, lawyer, accountant, or a financial planner for advice to address their personal situations.

The Statue of Liberty

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Published December 11, 2010 at 1:00 am (Updated December 11, 2010 at 2:35 pm)

Strange things going on in copper market

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