COPPER RALLY HAS LONGEVITY, SAY BULLS

By Javier Blas in London 2009-08-25
The doubling of the spot copper price since January to more than $6,000 a tonne have taken the headlines in the base metal market. But it is the price movements in copper far forward contracts that have been even more dramatic.
The London Metal Exchange 63-month copper price – a traditional forward contract benchmark – jumped earlier this month to $5,861 a tonne, approaching its all-time high of $6,998 a tonne set in May 2008, and its highest level for almost a year.
Copper bulls note that the last time the red metal's forward prices were so high the spot contract traded higher than $8,000 a tonne, well above its current level. Although far forward prices are considered merely an indicator of future price movements, analysts agree they nonetheless provide useful hints about current market psychology.
“The market believes that the copper rally is going to be long-lived,” said Max Layton, a base metals analyst at Macquarie in London, in a recent research note.
The surge in long-dated prices appears to be building on copper producers' greater reluctance to sell forward into the rally, waiting for even higher prices and a greater willingness of some market participants, particularly hedge funds, to buy into a supply-driven bullish long-term view for the red metal, analysts and traders said.
In early 2006, when copper prices surged from $5,000 to more than $8,000 a tonne, some producers, fearful of missing the rally, rushed to forward sell their production, capping the rally in forward prices below $4,500 a tonne. Later, the producers realised that they moved too early, as the rally proved sustainable.
The re-emergence of long-term supply constraints is also helping to boost forward prices, analysts said.
Among those factors, analysts highlighted lower ore grades, with a drop in copper ore content from 0.98 per cent at the beginning of the century to today's 0.85 per cent, and a movement from stable producing countries such as Chile, the US and Peru towards higher-risk production areas, including the Democratic Republic of Congo, Kazakhstan or even Afghanistan.
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