Copper Surge Loses Momentum

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". . .the further we are from levels justified by the fundamentals, 'the further there is to fall.'"

The price of copper—traditionally a leading indicator for the global economy, given its widespread industrial use—has more than doubled in 2009 as bullish investors have anticipated a global economic recovery.

A weak dollar has provided extra impetus. But the market looks "overinflated" after the rapid run-up, says Michael Khosrowpur of Triland Metals. Copper now looks vulnerable to a correction.

A key driver of the copper price surge has been record imports by China, the world's biggest copper consumer. Imports more than doubled in the first half. But the momentum is now fading. Imports peaked in June, then fell 15% month-on-month in July and a further 20% in August.

A 42% slide in the Baltic Dry Index, which tracks shipping costs, from its 2009 peak, also suggests that the Chinese have "backed off" from commodity imports, says Gavin Durrell of Island View Shipping.

Nor has underlying Chinese demand been nearly as strong as the record imports would suggest; the demand for imports has been fuelled mostly by government stockpiling. Note that inventories in Shanghai jumped by 12% last week and are now at their highest level since June 2007.

It's a similar story globally: stockpiles in warehouses tracked by the London Metal Exchange have jumped by 20% since July and are at their highest since May.

What growth we have seen so far has been delivered largely by government stimulus programs, which will have to be withdrawn, while weak Western consumption, notably in America, where consumers are paying down their debts, suggests any economic rebound won't be sustainable. The "pick-up in real demand we've all been waiting for," says Robin Bhar of Calyon, is set to disappoint.

"We're seeing the effects of the fiscal rescue packages and other things like infrastructure projects," says Eugen Weinberg of Commerzbank. Copper prices have been driven by "economic optimism," but the "difference between fundamentals and prices" has got "bigger by the day." And the further we are from levels justified by the fundamentals, "the further there is to fall." The copper market is on borrowed time.

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