Copper May Approach $11,000/Mt. in 2011

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"Copper will remain in fundamental deficit this year and next."

Copper prices could get close to $11,000/Mt. this year, underpinned by demand growth and a tight supply scenario, Peter Archbold, senior director and head of basic materials at Fitch Ratings, said Friday.

"Copper will remain in fundamental deficit this year and next year," with LME stocks falling to the equivalent of one to two weeks supply, Archbold told a briefing in London.

Three-month copper prices on the LME reached an all-time high of $10,190/Mt. in mid-February, though the market has since eased back, closing Thursday at $9,430/Mt.

The rise in copper prices has seen the differential between copper and aluminum prices balloon, leading to the possibility of substitution of aluminum for copper in some applications, Archbold said.

The aluminum price as a proportion of the copper price has fallen from around 80% in the early part of the last decade to around 25%–30% currently, he noted, adding that such a large price differential between the two metals "creates an incentive to substitute where you can."

Nevertheless, the aggregate market impact of such moves is likely to be fairly small, Archbold said.

Although lagging copper, aluminum prices have also been on the rise of late, recovering from a 2010 low at $1,880/Mt. to current levels above $2,600/Mt.

This price rise has taken place "in the context of absolute record stock levels," Archbold said, suggesting that around 80% of LME aluminum stocks—which currently stand at over 4.5 million Mt.—are tied up in financing deals.

The downside risk to the market lies in the possibility that a combination of a flattening forward curve and potential rises in interest rates could make these deals less attractive, leading to the release of metal back to the market, he said.

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