Copper's Surge Lifts Fellow Metals

¹²Copper's Surge Lifts Fellow Metals

By Javier Blas In London | 7 April 2010

Published: April 6 2010 19:33 | Last Updated: April 6 2010 19:33

Copper prices crossed the key $8,000 a tonne barrier on Tuesday, leading other metals to their highest levels in 20 months amid signs that demand, already strong in China and the rest of Asia, is improving now in the US, Europe and Japan. Mining executives and some analysts and traders say that the surge in copper and other metals reflects re-stocking in developed countries. Companies ran down their inventories to critically low levels last year during the economic crisis.

"We believe that the world ex-China has already started on a dramatic restocking programme," said Julien Garran, a commodities analyst at UBS in London. He estimates that the re-stocking could add 25-50 per cent extra demand until July. Copper prices at the London Metal Exchange on Tuesday rose to $8,010 a tonne, the highest level since August 2008 and up 90 per cent over the past year.

The red metal is known as "Dr Copper", because many believe that its price swings anticipate/predict shifts in global manufacturing activity, as if it possessed a degree in economics. Copper has only traded above the $8,000 a tonne level during phases of strong economic activity, including the first half of 2008 and brief periods in 2006 and 2007. It hit an-all time high of $8,940 a tonne in July 2008.

The broader LME index, which tracks the cost of aluminium, zinc, lead, nickel and tin as well as copper, jumped to its highest in more than 20 months. Other commodities were also higher on the day, with oil briefly trading at $87 a barrel. But some analysts cautioned that commodity investors' flows on the back of positive economic news, rather than actual consumption were driving metals and other commodities prices, suggesting that the raw materials market was vulnerable to a correction. Yingxi Yu, a commodities analyst with Barclays Capital, said: "The trigger for this latest wave of buying appears to be partly macro-related, with a series of strong economic data releases out of the US."

However, metals and ores, to which investors have little access, have also posted strong gains. Spot iron ore prices on Tuesday surged to $160.5 a tonne, the highest in 18 months and up 170 per cent over the past year. The cost of ferrochrome, a key ingredient in stainless steel, will increase 35 per cent this quarter to $1.36 per pound after quarterly negotiations between miners and steelmakers. But at these levels even the most ardent commodity bull has to question whether the sector is becoming overvalued.

The FTSE All-Share mining index was up 4.6 per cent in London’s holiday-shortened week last. The rise owed less to the news about iron ore than the raft of positive global manufacturing data on Thursday that supported the growing view that the recovery is gathering momentum and the world can avoid a double-dip recession.

Mining stocks have tripled from their low in December 2008. Rio Tinto’s shares pushed above £40 on Thursday, after hitting a nadir of £8.66 on December 5, 2008 (they are still below their £58 peak in May 2008). BHP shares at £23 are already above their summer 2008 peak of £21.96. And Xstrata shares, worth less than £3 in early March last year, are now worth £13 apiece.

The key question facing all investors in commodities in the coming months is whether Chinese demand will hold at recent levels. The optimists believe China will continue to stockpile commodities, underpinning demand. The sceptics say the country’s booming economy will have to be cooled by monetary tightening and that will eventually hurt demand.

Interestingly, investors in the Chinese stock market appear less bullish about the country’s prospects than those in other markets, given that the Shanghai Composite fell by 5 per cent in the first quarter. This cannot be ignored unless the country’s stock market is completely divorced from its fundamental economic health. Another reason to doubt whether the mining rally is sustainable is that commodity price rises will feed into increased manufacturing costs and ultimately higher inflation. That will inevitably lead to higher global interest rates [[which we are already seeing: normxxx]].