SMM Exclusive: Analysis of Recent Rapid Copper Price Adjustments

SHANGHAI, Feb. 4 (SMM) -- On February 3rd, LME copper prices plunged USD 255/mt, and fell as low as USD 6,530/mt, tumbling 16% from the highest level of USD 7,795/mt seen on February 7th. Over the past one week, copper prices tumbled over 11%. SMM believes the following factors are reasons behind rapid adjustments of copper prices which were originally seen by optimistic outlook.

First: Monetary Policy Adjustment. Countries around the world in 2009 implemented quantitative easing monetary policy with a large amount of cash injection into market to stimulate economic recovery. As profit-driven, huge cash, however, flew into stock, real estate, and commodity markets following slower recovery of economy, low corporate profits and uncertainty of demand. As a result, base metals markets soared, with copper price gains over 140% for the whole year of 2009. Given concerns towards higher inflation pressure from soaring asset prices, China's Central Bank unexpectedly increased the deposit reserve requirement ratio in earlier January after Australian central bank raised interest rate, lifting market expectations of credit tightening. Liquidity-driven commodity prices were very sensitive to adjustment of monetary policy, weighing down copper prices.

Second: Higher US Dollar Index. There is no a perfect negative correlation between the US dollar index and commodity prices. The key factor is to understand the exact reason behind rising US dollar index. If the US dollar index strengthens from risk avoidance, the negative correlation between the two will emerge obviously, since rising US dollar index as a result risk-avoidance behavior usually indicates a big problem in macro-economy. If the US dollar index rallies along with relatively rapid economic recovery in the US, the correlation between US dollar index and commodity prices depends on two following different conditions. Firstly, if economies at countries across the global are all on its recovery track, and the US economy is recovery at a more rapid pace than any other countries, higher expectations of overall consumption will push up the US dollar index, and commodity prices as well, just like what happened in December 2009. Secondly, the US economy is on the recovery track, but at a slow rate, and other countries reported slower improvement, similar to what happened recently (debt crisis in Greece, Portugal, and Spain triggered market concerns towards economic recovery in the Euro zone, and Japan experienced worse economic performance). If the US dollar index increases as a result of this, the negative correlation between US dollar index and commodity prices will come out.

Third, China Factor Becomes Biggest Market Concerns. China is world's largest copper consumer, and market is very sensitive to any changes of consumption performance in China, especially when demand recovery in overseas market reports fluctuations. In 2009, China's refined copper consumption was very strong despite of global economic downturn. China's imports of refined copper totaled 3.18 million mt for 2009, with net imports of 3.11 million mt, soaring 128% YoY. China's apparent consumption of refined copper surged 41% or 2.13 million mt YoY to 7.27 million mt. China's robust copper demand significantly offset negative impact of waning demand in other countries. With the start of 2010, actual demand recovery in the US and EU is not as strong as expected, and so whether or not China will continue to post strong consumption will determine copper price trends. China's Central Bank's move to lift the deposit reserve requirement ratio in earlier January triggered market fears that China's strong demand spurred by investment last year will not continue into 2010. In addition, macro-controlling measures in real estate markets will likely make copper consumption in construction and relevant sectors to drop. Market worries of falling demand in China have become one major reason behind recent rapid copper price declines.

At present, trading sentiment in the Chinese market will be low following the approach of Chinese New Year holiday, which will unlikely reflect changes of actual demand in China, with no clear direction from market fundamentals. Hence, current copper prices will be greatly influenced by financial news. At present, market is waiting for the US non-farm employment data to be released on this Friday. The data will judge how the US economy is going on. If the date is unfavorable, LME copper prices will find support in the USD 6,300-6,500/mt range.

To contact the writer on this report: stevenzhou@smm.cn

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