Minmetals Resources Ltd.'s $6.3-billion hostile takeover bid for Equinox Minerals Ltd. is evidence of high expectations for long-term copper demand, analysts and traders said, but the metal doesn't look like a great investment over the next few months.
"It's incredible that they're still buying copper assets even at these high copper prices. What it says to me is that they think that longer term, these prices are going even higher," said John Kurgan, commodity strategist at retail commodity-trading house Lind-Waldock. "The question is, where are prices going in the short term?"
The answer, based on the past couple of months, is nowhere. Though copper continues to trade at historically high prices around $4.25 (U.S.) a pound (the Globe Investor chart shows prices in cents per pound), prices have drifted in a sideways range since the beginning of the year, and are down 8 per cent from their mid-February peak - even as prices for many other commodities have continued to test new highs.
"It doesn't look terrible," said Richard Briggs, a commodities broker at MF Global Canada in Montreal. "We're just seeing more selling coming in, and a slowdown in interest."
He said copper has fallen off traders' radar, as many have turned their attention to the current big thing in the commodity pit: Silver, which has skyrocketed 44 per cent since late January.
The loss of interest in copper reflects a collection of question marks forming around demand for the metal in the coming months. Market watchers said the unclear pace of U.S. economic recovery, the impact of Japan's earthquake and the outlook for Chinese demand have all clouded the view for copper, and traders have become cautious as a result.
"Volumes are pretty thin," Mr. Kurgan said. "There's just that uncertainty out there."
Overflowing Inventories
China has been at the forefront of copper traders' worries, as continued talk of central bank interventions to cool the country's inflationary pressures has raised concerns about a decline in demand from the fast-growing, resource-intensive Chinese economy. On top of that, the Shanghai Futures Exchange has reported that China's copper inventories have surged 85 per cent in the past six months, suggesting that the country's appetite for copper on the open market could be small in the coming months. China is responsible for nearly 40 per cent of the world's copper consumption.
"The market is broadly concerned that China has overimported copper," said Bart Melek, head of commodity strategy at TD Securities.
Mr. Melek predicted that policy tightening by Chinese authorities could trim demand and contribute to stagnant copper prices through the middle of the year. He forecast that copper would average $4.35 a pound in the second quarter, down from $4.40 in the first quarter.
But he predicted that once China's central bank makes its moves and delivers some clarity to the market, "copper could take off."
Mr. Kurgan expects copper to be range-bound between $4.10 and $4.60 for "a few months," but said that once it breaks out of that range, "I think it's going to be to the upside."
Analysts believe that an acceleration of the global economic recovery in the second half of this year, coupled with relatively modest growth in production, will drive copper demand above supplies for 2011. Mr. Melek predicts a global supply shortfall of 5,000 to 6,000 tonnes for the year - a bullish situation for prices.
Meanwhile, the massive reconstruction effort required in Japan as a result of last month's earthquake and tsunami should get under way in the second half of the year - turning the current temporary decline in demand from that country into a significant jump in demand.
"We expect attention will turn to reconstruction in Japan, commencing perhaps in [the second half of 2011] with copper and zinc being the principal beneficiaries," said Deutsche Bank Securities in its quarterly metals research report, issued Monday.
Deutsche Bank forecast an average copper price of $4.61 a pound for 2011 and $5.22 for 2012 - which would represent record levels.
"These are still fabulous, incredible prices we're looking at," said Mr. Melek. "I like copper quite a bit."
David Parkinson