Copper $1/lb Likely?

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"We're going to see a catastrophe in the market."

Yesterday on CNBC, David Threlkeld a metals trader at Resolved Inc said, "We're going to see a catastrophe in the market." The catastrophe he referred to is copper. Threlkeld argues that China has stockpiled copper to the tune of two million tons and that at some point, "China will release the stockpile onto the market." The CNBC articles goes on to say that another factor compounding the issue involves the fact that speculators have already bid up the price of copper having previously bet on a global recovery. The theory first started floating on the net about a week ago Business Week. As observers of metals markets, we thought the article worthy of discussion. After all, few if any analysts have called for $1/lb copper for 2010. Here is the CNBC Fast Money clip.

According to the article, 90% of copper buying has come from speculators. Threlkeld explains as follows, "Whether they are ETF speculators or China pig farmer speculators it doesn't really matter, because that buying is going to come back to the market," Threlkeld also points to interest rates—specifically that the $1/lb forecast "may be driven by higher interest rates in China or the U.S." Last, the $1/lb scenario Threlkeld looks at the inverse relationship between supply increasing and demand decreasing, "What we have now is. . .a unique situation, whereby we have a surplus and production has gone up and consumption has gone down."

For sure, stocks have increased but we'd suggest that they have not reached historically high levels. China accounts for a large portion of overall copper demand (over 35% of global copper demand). We also think China stimulus programs around the power grid and rail projects will continue to support demand. True ETF and speculative activity could cause investors to dump shares/holdings if prices did collapse, perhaps further exacerbating a drop in copper prices.

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