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Gold/Mining/Energy : Copper - analysis -- Ignore unavailable to you. Want to Upgrade?

To: Stephen O who wrote (1975)	2/27/2009 3:01:50 PM
From: Stephen O	Read Replies (2) \| Respond to of 2131

an email I received from a reliable source I have been having some discussions with my LME trading desk located in New York regarding their views on copper prices. They have a contrarian view on copper prices compared to most investors - they believe copper prices will remain strong for the next few months and may reach as high as $2.00/lb in March/April. Here is their rationale for strong copper prices over the next few months: The market has been concerned about the recent rapid increase in LME copper inventories We believe that the recent increase in LME inventories is largely due to off-market inventories being put back into LME warehouses Various banks which had previously financed off-market inventories are no longer providing this funding due to the credit crisis We do believe that China has been buying copper since mid-December according to our market intelligence We suspect that China has been buying copper through the forward market for delivery in March Buying copper through the forward market would obviously allow China to accumulate physical copper without causing a spike in spot prices Based on historical buying patterns, we believe China may end up purchasing as much as 250,000 tonnes of copper vs current LME stockpiles of 500,000 tonnes We expect that LME inventories will start declining in March as China starts taking delivery There is now ample evidence that there is a shortage of physical copper in China based on the following evidence: Shanghai warehouses only have 30,000 tonnes of copper in stock Shanghai futures market for copper is now in backwardation and trading at a significant premium to LME prices ($4000 vs $3400 on LME) Scrap copper availability has significantly tightened LME inventories in Asian warehouses have started to decline Cancelled warrants on the LME which represent future delivery are starting to increase We estimate there is still a large short position in the copper market as we estimate that the systematic trading community's short position is 59% of their total capacity: