Copper Prices Rally on QE2 Expectations

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"Copper settled at a 27-month high Tuesday."

Copper settled at a 27-month high Tuesday, buoyed by expectations for a second round of quantitative easing (QE). Currently in meetings, the FOMC is widely anticipated to announce a Treasury-purchasing program worth ~$500 billion. QE2 could prove especially beneficial for copper prices; some investors believe the program will raise copper demand by improving construction and manufacturing sectors, which are key end users of the red metal.

Copper prices were given extra impetus from a weak dollar, which retreated 1% relative the euro Tuesday. On the Comex, copper for December delivery settled up 1.4%, at $3.8390/lb.

China's appetite for copper shows no sign of slowing down. The country's copper demand may climb to 8.5 million tons (Mt.) in 2015 from 7.5 Mt. last year, Zhang Fengkui, head of the non-ferrous metals office at the Ministry of Industry and Information Technology, said at a conference. At the same time, rising labor costs have analysts predicting that the Asian country will import proportionally more of the high-grade copper scrap.

In order to keep operating costs in check, Chinese companies will avoid skyrocketing domestic labor costs by importing higher-grade copper stocks. So far this year, the metal content in imports has climbed to 39% from 18%–20% copper before 2008. The copper contained in scrap imports totaled 1.1 Mt. from January–August. The figure for 2009 was 1.2 Mt. Rising labor cost means it's no longer profitable to import scrap, which only contains 10%–20% copper.

With already tight fundamentals, copper industry experts are sounding the alarm on possible metal shortages in the following years. Copper supply has been limited and the financial crisis has delayed mine development, with projects representing >9 Mt. of concentrate struggling to find funding. Global copper-concentrate output capacity will expand by less than 2.5 Mt. from 2010–2013.

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