Copper Oversupply Leads to Downside Risk

Source:

"Demand in China is. . .not enough to mop up the excess supplies in the market."

Copper for delivery within three months has lost 16% in the last month on the LME falling to $6,730 Tuesday from $7,990 in early April. On the other hand, the Changjiang spot price, or the price in the China market, has fallen 11.3% during the same period to 54,950 yuan.

During the first two months of 2010, copper had a market surplus of 148,000 tons, and 197,000 tons on a seasonally adjusted basis, almost similar to the first two months of 2009.

"Demand in China is quite good currently but it's not enough to mop up the excess supplies in the market," Tian Lianfeng, an analyst at Zheshang Futures, told Bloomberg. "Fundamentally, in this economic environment, Shanghai copper should be at 48,000 yuan because stockpiles and imports are still so high."

During the same period, world consumption increased by 163,000 tons from the first two months of 2009. However, this time around, it wasn't the Chinese who were consuming copper. Japan consumption increased by over 50,000 tons, while the European Union witnessed an increase in excess of 15,000 tons. Other contributors included Brazil, India, Korea and Taiwan.

We believe that this overhang in supply is negative for copper prices, which may lead to a further downside in the metal. The factors that play a crucial role in price determination are demand/supply and external forces like the ongoing eurozone crisis, which is taking its toll not only on equity but commodity markets as well and shows no signs of cooling down.

Copper imports, which once stood at 14,535 tons during April 2007, have fallen to 1,813 tons during March 2010. Analysts think Shanghai copper is overpriced, which could result in further correction in the metal. The outlook for copper is negative; investors need to trade the metal with caution.

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