Copper Bubble or Bull? Pt. I


"Is copper on a sustainable bull run?"

Copper is in supply deficit and demand is coming back not just from the emerging markets but gradually from developed markets, as well. The consensus is that demand is outstripping supply due in part to the amount of time it took miners to bring capacity back onstream after the 20082009 crisis.

To what extent is this correct? If so, is copper on a sustainable bull run? Pointing to operational problems mines face, falling ore grades, labor unrest and the cutbacks initiated in 2009, the International Copper Study Group (ICSG) said production will likely be limited to 16.2 Mt. in 2010. Looking to 2011, increased economic activity is expected to boost end-user demand for the metal much faster than production, pushing the global market deeper into deficit of about 400,000 tons. New mine projects in 2011 are few and far between; most additional capacity will come from enhancements to existing operations. But with potential shortfalls looming elsewhere, such additional production may do nothing more than plugging the gaps left elsewhere.

While no timetable for ETF Securities' copper- and base metal-backed basket ETFs has been set, it is widely acknowledged that, at least for copper, a physically backed fund would suck metal out of the physical market increasing shortages. Thus, it'll likely be a popular self-fulfilling investment. The resulting shortages would push prices higher, rewarding the investor.

Chinese buying of primary cathode has been more muted of late. The recent high prices are possibly putting buyers off in the short term, but the gradually appreciating RMB is closing the SHFE-LME arbitrage window, a fine calculation at the best of times, making primary metal imports more likely if Chinese buyers get panicked by a continually strengthening LME.

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