Copper Market Is Tight, Long-Term Bull View Intact -Macquarie

SINGAPORE, Jul 04, 2010 (Dow Jones Commodities News via Comtex) -- Copper prices are still trading far above the cost of production, despite a recent correction, because the market is materially tight, Macquarie Bank said in a report.

"The visible data--in particular, copper inventories--have continued to show that the market is tightening up, and this has particularly been the case over the past two months."

London Metal Exchange warehouse inventories of copper fell 2,125 metric tons Friday to 447,300 tons and are down 10% since the start of May.

Macquarie said the LME stock drawdowns have been driven by a pickup in demand ex-China, as well as continued strength in Chinese imports.

"The LME/SHFE Chinese arbitrage has been encouraging imports into China since early May, which will see imports remain strong in June and July at the least, meaning China's call on ex-Chinese stocks will remain strong--note we recently have seen a significant pickup in Korean cancelled warrants, suggesting demand from China is flowing into Asia (rather than drawing down bonded warehouse or domestic inventories)," said the report.

The bank said its estimates suggest the copper market has been close to balance so far this year compared with an estimated surplus of around 1 million tons in 2009.

It said this reflects continued poor growth in supply and a very strong rebound in Chinese demand of more than 20% on year in the first half, while it estimates ex-Chinese demand has risen around 10%-15% on year in the first half.

Copper prices have fallen 20% since mid-April's peak of $8,043/ton to Friday's kerb at $6,410 and could fall further in the next three to four months, said Macquarie, with another 10% of potential downside due to seasonal weakness and macroeconomic worries in Europe.

However, the bank remains bullish on the long-term outlook for copper and says the risk-reward for long-term investors looks positive at the moment.

"Picking the bottom in this environment is very difficult, but either way, for those with longer-term horizons, we believe copper is still the place to be (the risks are much more evenly balanced than the naysayers will have you believe)."