Copper has a seasonal "sweet spot" from mid-December to the beginning of May. What are prospects this year?
Copper on average during the past 20 years have gained 11.0 per cent per period from the middle of December to the first week in May. The trade has been profitable in 13 of the past 16 periods. The reason for strength is greater seasonal demand during the traditional construction, home building and auto buying season each spring. In recent years, growing demand by China has become an important factor. Demand traditionally slows in the summer when many refiners, particularly in Europe, shut down operations for the summer holiday period.
What about this year? Prospects for the current period of seasonal strength are above average:
• Copper inventories are declining. Copper inventories in London have dropped 110,000 to approximately 355,000 tonnes during the past three months and have increased only about 2,000 to 90,000 tonnes in the COMEX market in New York.
• Supply has been limited in recent months by labour strikes, most notably at Freeport McMoran Copper and Gold's Grasberg mine, the third largest copper mine in the world. A settlement at Grasberg recently was reached after a three-month strike and workers are scheduled to return at the end of this week.
• No major new mines are scheduled to come into production in 2012.
• Demand in China is expected to increase significantly in 2012 as economic growth stabilizes near an 8.7 per cent annual rate. China recently has taken monetary steps to stimulate its economy. China imported a record 508,942 tonnes of copper in December, up 13 per cent from the previous month and up an impressive 48 per cent from 2010. Despite the imports, inventories in Shanghai increased only 60,000 to 120,000 tonnes. China reportedly accounts for 40 per cent of world consumption of the metal.
• Demand in other countries is mixed in 2012. Demand is expected to decline in Europe, but is expected to improve in North America and Asian markets, most notably in Japan as the country recovers from the tsunami. Gains in 2012 in North America are expected to in the 10-15 per cent range.
On the charts, copper currently at $3.76 has an improving technical profile. It bottomed on schedule in mid-December 2011 at $3.23 per pound. Short-term momentum indicators recovered from oversold levels. Strength relative to the S&P 500 Index also turned positive in mid-December. Copper broke resistance at $3.75 per pound Wednesday on rumours of Chinese buying. Short-term momentum indicators currently are overbought, but have yet to show signs of peaking.
Preferred strategy is to accumulate copper futures, Exchange Traded Notes and equities on weakness following release of lower year-over-year fourth-quarter reports released by copper producers. The Exchange Traded Note iPath DJ-UBS Copper: is actively traded in the New York. Actively traded copper producer equities include Freeport McMoran Copper and Gold , Inmet , Southern Copper , Teck Resources , BHP Billiton and Hudbay Mining .
Don Vialoux is the author of free daily reports on equity markets, sectors, commodities and Exchange Traded Funds. He is also a research analyst for JovInvestment Management Inc. All of the views expressed herein are his personal views although they may be reflected in positions or transactions in the various client portfolios managed by JovInvestment. JovInvestment is the investment manager for the Horizons family of ETFs. Daily reports are available at http://www.timingthemarket.ca/
Don Vialoux