By Prieur du Plessis, on January 3rd, 2011 posted in: Copper, Investment Leave your comment

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This post is a guest contribution by Dian Chu, market analyst, trader and author of the Economic Forecasts and Opinions blog.

Year 2010 had been good to almost all investment classes. Stocks, bonds, commodities, and dollar are all moving higher in tandem, a first of such unison since 2005.  Among them, commodity is the one leading the pack partly on dollar weakness, as well as propped up by world’s central banks quantitative easing.

Base metals, in particular, are further supported as China keeps on trucking with double-digit growth despite most of the world practically stood still during the worst global recession since World War II.

If you think Gold’s 30% gain last year is impressive, one base metal–Copper–even outshined the precious metal by rallying 33% on the year, and reached an all-time record in London, New York, and a 3-1/2 year high in Shanghai. Copper futures for March delivery on the Comex in New York stood at $4.4470 a pound at year-end, a record settlement.

Nonetheless, compared to Gold relatively steady ascend, Copper prices have been on a roller coaster ride in the past few years, dropping almost 54% in 2008 amid global financial crisis, before staging a 130% comeback in 2009, and +33% in 2010 (See Chart Above).

Santa’s Short Cover Rally
China is the world’s single largest buyer of copper. As such, copper prices typically rise and fall on any news coming out of China. However, this time around, particularly in the second half of 2010, markets did not even blink in the face of a Christmas interest rate hike and other tightening measures already implemented by China.

Before anybody declares Copper the Untouchable, I’d like to point out that a lood at the CFTC Commitment of Traders report quickly reveals that in November, commercial participants, who accounted for 54.4% of copper futures open interest, held net short positions.

This suggests some institutional players probably called the top of the market too soon, which is not that far off given the prior highs reached in pre-crisis 2008.  But as I noted my analysis of gold and euro,  the global excess liquidity is distorting almost all signals thus making trend analysis quite challenging.  And the force majeure declared by Chile’s Collahuasi Mine around Dec. 20 only compounded the short squeeze, as Collahuasi is world’s 3rd largest copper mine accounting for about 3% of annual world supply.

So, that means the 14% jump in December month was largely a short covering rally.  Now, looking ahead into 2011, the price direction of copper will likely still hinge on supply, and mostly China demand, but it also depends on a couple of new market factors emerged just within the last year or so.

A More Diversified Supply Base
On the fundamental side, the red base metal is seen as an economic barometer since it is mainly used in building construction and electronics accounting for about 50% and 21% of the copper usage respectively in the United States. Transportation equipment (11%), consumer and general products (10%), and industrial machinery and equipment (8%) are the other major industrial usage sectors, according to the USGS.

Continue reading Copper outlook 2011 – a Beijing opera