Monday, July 25, 2011

Copper will keep rising in H2-2011 By Shan Saeed

Copper has slightly disappointed investors, ending the first half of the year with a decline of 3.50 %. Worries about global inflation and, more specifically, the potential slowing of China’s economy weighed on copper’s price. The red metal rose 5 percent quickly in the new year, but similar to zinc, lead, palladium and platinum prices, declined sharply at the beginning of May.

Since the end of June, copper has been slowly inching its way up, with the past three weeks having produced positive results. Part of this rise is due to reduced supply issues. Chile, the world’s largest copper producer, has been plagued by power outages, strikes, accidents and heavy rains. According to my research and analysis, South American country that mines about one-fifth of the world’s copper.

In terms of demand, copper is a necessary ingredient for numerous building projects. Electrical power cables, electrical equipment, automobile radiators, cooling and refrigeration tubing, heat exchangers and water pipes all require copper. With all the construction and infrastructure building in China over the past several years, it’s not surprising that this country is the No. 1 world consumer of copper. It’s estimated that China accounted for nearly 40 percent of global copper consumption last year. Prices will touch 11,000 / ton in 2011

Because of this large demand, similar to our outlook for oil, copper prices hinge on China’s ongoing development. While some have begun to wonder about the health of the country’s continuing growth and development, I believe that “real demand" in the country remains robust.

Take developer activity, for example, It has been a huge driver of construction growth in 2011. The media has focused its attention on ghost cities and lagging sales of property in China. Yet it’s important to consider the property sales across all different sizes of cities. Chinese social house – another reason to buy copper and iron ore. This was due to the government restricting investment demand to slow growth. However, these larger cities only account for 20 percent of the total market.

Conversely, many smaller cities, such as Anquing, Guizhou, Luzhou, Mudanjiang, and Shijiazhuang, have had double-digit year-over-year growth in unit sales so far this year. In the case of Hohhot, the capital city of Inner Mongolia, sales growth has tripled. Government investment has led to urban space increasing from 80 square kilometers in 2000 to 150 square kilometers last year, according to the city’s government website. Hohhot, which means “green city” in Mongolian, has grown to more than 2 million people and has become a hub for agriculture and manufacturing.
Most importantly, the tremendous sales activity in these smaller cities indicates “there has been enough cash to keep construction activity going.

In addition, China’s social housing project should drive incremental demand for copper. China is “aiming for 10 million social housing units, up from 5.8 million in 2010.” The country has built only 3.4 million units so far this year, but based on China’s habit of exceeding its objectives.

Even if the naysayers think China’s growth will slow because of the government’s monetary policy restrictions, there’s consensus among research experts that the country’s inventory of copper is getting low. According to Goldman Sachs’ report the copper market indicated that in the second half of 2011, the “winding down of destocking will lead to a stronger Chinese pull on global supply.” China seems to have no choice but to go back to the market for copper, if only to replenish its supply.

I totally agree with this report. I am super-bullish on China. I think the copper’s fundamentals and expectations of further growth, a “very sizeable drawdown” in Chinese copper inventories this year. I pointed out earlier at the start of this year “some point in time, they will get to a point at which they have run down inventory levels to an uncomfortably low level and then there is no alternative to coming back to the international market.”

Disclaimer: This is just a research report and not an investment piece. All financial transactions carry a RISK

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