A snippet on copper from a report I just received from Sprott:
"So why the large price correction, especially in commodities that China will only consume more of, such as copper and oil? One point worth noting is that copper in China is currently trading at a premium to the LME (London Metal Exchange) price – a 25% premium in fact. This compares to only a 10% premium during most of last summer.
Furthermore, copper inventories on the Shanghai Futures Exchange have been declining since June, with only a slight uptick in recent weeks. There is also evidence that Chinese consumers were destocking copper in 2006 to take advantage of high prices, by an amount that (according to some estimates) equates to almost 3% of world copper supply. Copper analysts are claiming that this destocking is now over and Chinese consumers (especially in power generation, which accounts for almost half of Chinese copper demand) now find themselves short of the metal. This should all bode well for copper demand going forward. Commodities are a global market, thus local distortions are unlikely to persist in the long run.
We believe another temporary factor that has been suppressing copper prices is the abrupt weakness in the US housing market. It wouldn’t be an exaggeration to say that the US housing market has fallen off a cliff in the latter half of 2006. New residential construction is a significant source of copper demand, with the average home taking approximately 400 pounds of copper to build.
As the inventory of unsold homes in the US swelled, homebuilder demand for copper must have fallen precipitously – only to return when unsold inventories are whittled away and new construction can begin once again. This would cause the demand for copper to bottom before the demand for housing does. Put another way, if new home starts fall from 1.25 million to, say, 1 million, then copper demand from housing should fall 20% in the long run.
However, there will be a transition period when demand falls by much more than that (conceivably even a 100% drop) if the decline in housing demand was unanticipated by homebuilders (which it clearly was). Thus, builders simply stopped ordering copper. We would anticipate that even in a weakening housing market in 2007, US homebuilder demand for copper will likely be stronger than it was in the second half of 2006. Weak demand, and the subsequent build-up of copper inventories, was a temporary factor that may have suppressed copper prices."
LC |
