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Copper in Shanghai climbed for a fifth day on optimism that demand may be picking up as global stockpiles decline.

Copper inventories in Shanghai fell 18 percent last week, the first drop in four weeks, the Shanghai Futures Exchange said in a report after the market closed June 26. Stockpiles of the metal tallied by the London Metal Exchange have declined every day since May 7.

“The large drop in inventories certainly lends support to the market,” Zeng Chao, analyst at Everbright Futures Co, said in an e-mail.

October-delivery copper on the Shanghai Futures Exchange, the most-active contract, gained as much as 0.9 percent to 40,740 yuan ($5,962) a metric ton and traded at 40,490 yuan at 10:03 a.m. Singapore time.

Three-month delivery copper on the London Metal Exchange rose as much as 1.8 percent to $5,125 a ton before trading at $5,105 a ton. Copper for September delivery in New York was up 0.6 percent at $2.3235 a pound.

Copper futures fell in Shanghai after China’s customs said that imports of the industrial metal gained last month, stoking speculation that stockpiles may climb.

Inbound shipments of the refined metal advanced 7 percent from the previous month to 317,947 metric tons, according to final data today from the Beijing-based customs office. The shipments for the month were a record, said Zhao Kai, an analyst at Jinrui Futures Co.

China has boosted imports of the metal used to make pipes and wires as the government ramps up the country’s 4 trillion yuan ($586 billion) stimulus program to counter the impact of the global recession.

The latest shipments will “further damp prices, especially at a time when we feel demand is cooling,” said Edward Fang, an analyst at China International Futures (Shanghai) Co.

August-delivery copper on the Shanghai Futures Exchange fell as much as 0.7 percent to 35,810 yuan a metric ton, and traded at 35,860 yuan at 9:24 a.m. local time.

Copper traded near a one-week high in London as improved sentiment among U.S. builders and rising equity markets increased investor confidence in the demand outlook for industrial metals.

The National Association of Home Builders/Wells Fargo index of builder confidence rose a second month to its highest since September, the Washington-based NAHB said yesterday. The Standard & Poor’s 500 Index jumped 3 percent, its biggest gain in two weeks.

The housing “news and the gain in the U.S. stock market subsequently showed sentiment has further improved and bolstered metals as well,” analysts led by Tan Wentao at HNA Topwin Futures Co. wrote in an e-mailed report today. “We’ll need more concrete data to sustain the positive mood.”

Copper for three-month delivery on the London Metal Exchange rose as much as 0.8 percent to $4,556 a ton, the highest intra-day price since May 13. It traded at $4,515 at 9:55 a.m. Shanghai time.

Copper for August delivery on the Shanghai Futures Exchange, the benchmark contract, climbed as much as 2.7 percent to 36,200 yuan ($5,303) a ton, and last traded at 35,910.

Copper consumption by China’s power industry is expected to grow by 6–7% in 2009 from 2.2 million mt consumed in 2008, Beijing Antaike Development, the state-owned nonferrous metals information provider said Friday.
Although Wire & Cable Industries Association of Shanghai predicts copper demand by the Chinese power sector to rise by 10% in 2009 on the government’s spending on the electricity industry, “our prediction for this year is less at just 6–7%,” one commodity analyst with Antaike said.
“Although the Chinese government’s Yuan 4 trillion ($584 billion) stimulus package would surely help raise domestic copper demand in the long run, it would not have a significant impact on copper consumption in the near term,” the Antaike source said.
Meanwhile, although industry experts predicted that total Chinese copper consumption to rise by 6% in 2009 from 5.2 million mt consumed in 2008, “we expect Chinese copper demand to grow by only 2% this year on weak demand by the downstream copper processing industries,” the Antaike source said. Antaike said although demand for copper by the Chinese power sector was still there this year, demand by the air-conditioner and refrigerator industries was still relatively weak. China produced 921,900 mt refined copper during the first quarter of this year, up 8.7% from the corresponding period in 2008, state statistics showed. The rise is due to the completion of new production lines.

China’s refined copper imports will rise by 34% to 1.95 million tonnes this year, said Ma Xiaoxin, vice-gm of Minmetals’ copper division. China imported nearly twice as much copper in the first three months of 2009 compared to a year earlier.
This pace will slow as importers turn again to copper scrap, and arbitrage imports fall, Ma said. “The shortage of copper scrap will ease in the second quarter, as rising [LME and SHFE] prices attract more traders into the recycling business,” she said at the 2009 Copper Industry Supply Chain Summit held by China Nonferrous Metals Industry Association (CNIA) in Beijing on Friday.. “Once the scrap problem is solved, China’s enthusiasm for refined copper will fade,” she added. China imported 748,281 tonnes of refined copper in January-March, up 92% year-on-year, according to Chinese customs.
“Arbitrage buying, replacement of copper scrap, China’s State Reserve Bureau (SRB) buying and infrastructure investment especially in cable and wire industry have been major reasons for rising copper imports this year,” Ma said. “But China’s physical demand has not yet picked up,” she warned.
Officials at the China Nonferrous Metals Industry Association (CNIA) agreed. “The length of time arbitrage window will last is another key factor for China’s refined copper imports this year,” said Shi Lin, analyst from CRU.
“Once the price gap between Shanghai and LME copper disappears, China’s imports will go down and the rebound of copper prices will come to and end,” Shi said. “LME copper is heading towards $5,000 per tonne, but I don’t think it will rally at that level and copper prices will fall back to $4,000 per tonne quite soon,” said Ma.

Tight credit is dampening copper-industry consolidation, even though some companies could be had cheaply right now.
Comex May copper closed at $1.6890 a pound, up nearly 10% for the week on Chinese-demand optimism and inventory declines. However, with the metal’s price off about 60% from last year’s record high, some producers may be feeling the squeeze enough to sell, quite likely at bargain values.
But the companies that might otherwise be in a position to buy are more focused on shoring up balance sheets, as the global economic downturn dents demand for their product. The credit-market crunch means few companies have money to spend on acquisitions, says Charles Bradford, equity analyst at Soleil-Bradford Research. And those that do have the cash are hoarding it.
To be sure, there are flutters of consolidation activity. Low copper prices are leading Norddeutsche Affinerie (ticker: NDA.XE), Europe’s biggest copper producer, to consider acquisitions in the European copper-fabrication market, as well as potential buys in South America and China, says Chief Executive Bernd Drouven. Sherwood Copper and Vancouver-based copper producer Capstone Mining (CS.Canada) merged in September. Frontera Copper (FCC.Canada) last month recommended that its shareholders accept an acquisition bid from Mexican investment firm Invecture Group, which bettered a competing offer from Grupo Mexico (GMEXICO.Mexico).
Among other factors crimping mergers and acquisitions is that producers are still eking out profits despite lowered prices. Falling input costs, such as oil and sulfuric acid, have helped. Still, “there is probably going to be some consolidation of the sector,” says Thomas Winmill, portfolio manager of the Midas Fund (MIDSX). For those acquisitions that do happen, bigger players would be more able to pay cash. Smaller-company activity would probably take the form of mergers of equals, Winmill says. He adds that he wouldn’t be surprised if Anvil Mining (AVM.Australia) — which in September had to scrap a private capital-raising because of poor market conditions — agreed to be acquired by a larger company. He says Capstone may be open to more corporate activity, and Equinox Minerals (EQN.Canada) might be attractive for a major.
Companies with relatively strong balance sheets are probably willing to wait out the lower prices, while those with weaker balance sheets and cash flow might be more open to being acquired, said Brian Hicks, co-manager of U.S. Global Investors’ Global Resources Fund (PSPFX). But they may have a hard time finding buyers. Mining companies are taking into consideration weak copper demand, multiyear lows for equities and swooning manufacturing. They aren’t looking to stretch their balance sheets on acquisitions, and will probably sit on the sidelines until the economy perks up and stronger prices emerge.
With this backdrop, large miners like Rio Tinto (RTO) and Xstrata (XTA.U.K.) aren’t likely to be shopping anytime soon, Hicks says. M&A activity probably won’t pick up until the second half of this year at the earliest.
“A lot of the large mining companies, like everyone else, are trying to pick themselves up off the mat,” Hicks says.
Rumination that recent OPEC cuts are tightening supplies lifted Nymex crude-oil; the April contract settled at $45.52 a barrel, up 1.7% on the week. Some also speculated that next week’s OPEC meeting would bring more cuts.

Global miner Rio Tinto expects 2009 to be a rough year in terms of both prices and volumes for key commodities, the firm’s chief economist said on Wednesday.
Vivek Tulpule, speaking to Reuters on the sidelines of a conference, said a pick-up was possible in 2010, though people should not be blind to the risk of a prolonged slowdown.
Rio Tinto’s major commodities are iron ore, aluminium and copper.
“2009 will be a very rough year for both prices and volumes and probably also for construction. A lot of people I talk to in the mining industry are suffering a crisis of confidence, they are putting a lot of projects on hold,” Mr Tulpule said.
“Our view is that it will be a slow year or two.”
Copper, zinc, nickel and other industrial staples have lost 50 per cent or more in value since last year’s collapse in commodities markets.
For iron ore, analysts predict benchmark prices could contract by as much as 60 per cent this year due to sharp drops in orders from steel mills.
Mr Tulpule said benefits flowing from China’s giant economic stimulus package, largely directed at infrastructure, were likely to show up midway through the year.
“It will take to time to offset the negative impact of a downturn in exports and construction, those areas have slowed very fast,” Mr Tulpule said.
He said the collapse in commodities flowed from two “crunches”: the global credit crunch and a crunch in China that had been induced by its attempts to slow the economy last year because of concerns it was overheating.
“The effect that had was way beyond their own expectations and certainly beyond the expectations of anyone else,” Mr Tupule said.
“That deceleration had a profound effect on our markets as when growth decelerates inventories build up, and when you’ve got lots of inventory you suddenly decide not to build things and then you don’t need to buy half as much copper and aluminium and iron ore.”

Aggressive de-leveraging and hedge fund liquidation may have sunk the global commodity market the first time around. But it’s the stagnant global economy that is conspiring to keep it underwater.
When the Reuters/Jefferies CRB Commodity Price Index rebounded 2.3 per cent yesterday, it was a welcome respite in a relentless rout that had knocked the commodity market to its lowest levels in nearly seven years. The bounce ended seven consecutive days of declines for the CRB index, during which time the benchmark had lost 11 per cent, relinquishing whatever modest gains it had mustered from its previous lows of early December.
Analysts say that while they don’t see much more room for most commodities to fall, the latest selloff is a signal that a second wave of worries has overtaken the commodity market. While the credit market crisis and hedge fund redemptions triggered the rapid exodus from commodities over the fall, now the deepening slowdown in physical demand for these products is entrenching the low- price environment.
“[Hedge fund liquidation] is becoming less and less of a factor. But the macro [economic] situation is just killing us,” said Edward Meir, commodity analyst at MF Global in Darien, Conn.
With most economists now seeing the economic slowdown lasting considerably longer than had been anticipated a few months ago, experts generally expect prices for many key commodities to drift sideways for much of this year. They said that while the low prices for some products will discourage production, that will be outweighed by the severe and lingering dearth in demand.
“In the near term, I don’t see a big break in the recent trend,” said Derek Burleton, senior economist at Toronto-Dominion Bank. “Commodity markets are going to remain very focused on the demand side.”
“A more meaningful recovery in commodities may have to wait until 2011.”
Within that dim general view, there are varying degrees of pessimism and hope for the key commodities in the Canadian market:
OIL
The weak demand and high inventories for crude should keep prices in their recent range of roughly $35 (U.S.) to $50 a barrel for much of 2009. However, analysts say oil should get support from the fact that at current price levels, new supplies will slow to a trickle.
“When you’re down at these kinds of [price] levels, the only part of the world where you can bring on new projects is the Middle East,” said Patricia Mohr, commodity market specialist at Bank of Nova Scotia, who predicts that global oil production will actually fall this year.
As a result of this supply slowdown, she said, “once we see some glimmer of hope on the global economy, you’ll see prices come back quite quickly.”
Analysts are looking for prices to average $75 to $80 a barrel in 2010.
GOLD
Gold has bucked the downward trend in commodities, as investors have flocked to it as a safe haven from plunging financial markets and economic and political uncertainties.
While the continued high-risk environment could well keep upward pressure on prices in the short term, and soaring U.S. government debt levels could turn investors away from U.S.-dollar debt and toward gold in the longer term, analysts are concerned that gold’s recent rally may be getting overdone, with gold approaching last year’s record peaks above $1,000 an ounce.
“But the main point is that gold seems to be able to maintain its value,” Ms. Mohr said, which should continue to attract investors to bullion-based exchange-trade funds and to gold equities.
COPPER
Copper is stuck in no-man’s land.
The price is depressed as a result of sluggish demand, but it’s still high enough to keep most producers profitable, meaning little pressure to slow production.
“The big declines are probably behind us,” Mr. Meir said. However, he said, prices in 2009 “are going to be in a sideways pattern.”
However, Ms. Mohr said copper should benefit from government stimulus efforts aimed at expanding electricity infrastructure, particularly in China.
ALUMINUM
Unlike copper, analysts said aluminum prices have fallen considerably below most producers’ cash costs, which is triggering production cuts and killing new mining projects in their tracks.
“In aluminum, everyone is in the red. Everyone is struggling,” Mr. Meir said.
That suggests that even a modest recovery in demand could put upward pressure on what could become a very tight market on the supply side. Analysts said the situation isn’t that different in other base metals, such as zinc and nickel.
“I think all of them are oversold,” said Bart Melek, global commodity strategist at BMO Nesbitt Burns.
CANOLA
Ms. Mohr believes canola is poised to be a strong performer this year.
It’s an attractive product for Canadian farmers because of its traditionally strong profit margins, and could benefit from the threat of drought in some of China’s key canola-growing regions. She said China has already been stockpiling canola in the past months.
TD’s Mr. Burleton thinks agricultural commodities in general look promising. He added that drought worries in several parts of the world could also bode well for grain prices.

While TD Bank sees the commodities market starting to rebound in the second half of 2009, followed by more pronounced price increases in 2010, the World Bank believes that, over the long term, commodity prices will remain substantially below recent bull market highs.

“The commodity market boom has come to an end,” the World Bank says. This boom has been the most pronounced since 1900, and was caused by rapid demand growth which was not matched by supply growth. In a report entitled “Global economic prospects — commodities at the crossroads,” the bank says that the boom has ended because of slower GDP growth, increased supplies and revised expectations.

The World Bank does not agree with observers who say that the global economy is moving to a new era characterized by relative shortage and permanently higher commodity prices. Over the long run, commodity prices are expected to fall, but not to 1990’s levels, since such low prices will suppress exploration and new development in the resource sector.

Over the next two decades, GDP growth rates will slow down because of slowing population growth and moderating income growth, in turn putting a lid on commodity demand growth. Moreover, technological progress should improve the efficiency of both production and use of commodities, ensuring that supply keeps pace with demand.

The World Bank says that, while commodity prices are likely to be higher than they were in the 1990’s and early 2000’s, a period when prices were depressed by excess supply, “the recent peaks (in prices). .. are unlikely to be the new norms,” since demand is not expected to outstrip supply over the long term.

The World Bank sees a marked slowdown in growth rates in the coming year. The bank projects that in 2009, investment in developed economies will shrink 3.1%, while investment in developing economies will grow by 3.4% — a sharp pullback from the 13% growth seen in 2007. The bank forecasts that the global economy will grow by 0.9% in 2009. Developing economies are projected to grow by 4.5%, well below the 7.9% growth rate seen in 2007.

Phenomenal growth in China’s GDP has led to growth in metal intensity in the economy, defined as metal consumption per unit of GDP. This trend is explained by the boom in investment, manufacturing and exports in China. Currently, metal intensity in China is four times higher than in developed countries and twice that of other developing countries.

China’s metal intensity is expected to stabilize in coming years and then start falling as high investment rates in the economy moderate, and the movement of manufacturing capacity to China from the rest of the world likewise slows down. Another factor which will decrease metal intensity in China is the changing make-up of the economy, where the share of services will increase at the expense of construction and manufacturing.

If China’s metal intensity stabilizes and then falls in coming years, global demand growth for metals, which has exceeded GDP growth rates, should first decline to match GDP growth rates and then decline even further to below GDP growth. The World Bank forecasts that, between 2015 and 2030, the global demand growth rate for metals will be 2.7% per year.

Turning from metals to energy, the World Bank says that future energy demand growth depends heavily on the pace of technological innovation in the automotive sector. Energy efficiency in the transportation sector is key to moderating demand, since 75% of energy demand growth is projected to come from this sector.
The World Bank believes that the prospects for technological improvements in the automotive sector are good, using technologies such as flex-fuel, hybrid cars, plug-in hybrids, electric cars and hydrogen-powered vehicles. Together, these have the potential to double fuel efficiency. The bank believes that, by 2050, the market share of such innovative vehicles can reach 90% in the developed world and 75% in the developing world, which will help reduce dependence on oil.

The bank forecasts oil consumption to grow to 114 million barrels per day in 2030 from 87 million today. Energy consumption as a whole is projected to grow at a faster pace, since consumption of other energy forms (such as coal, natural gas etc.) will grow faster than oil demand.

“Over the next 20 years, supplies of extracted commodities are likely to remain ample,” the bank says. The pace at which supply in the oil and metals sector catches up with demand depends on how quickly the supply of labour and supply in the heavy and specialized equipment sector can be restored. Capacity in these sectors has been reduced by years of low prices and weak investment, leading to long delivery times and high costs.

Recent high prices have helped address these capacity constraints. With the current recession, and with lower commodity prices, investment demand has fallen, and demand for specialized and heavy equipment has fallen in tandem, as have equipment prices. Despite this, prices are projected to remain relatively high and there will be a backlog in equipment deliveries for the next several years.

Although more and more resources, both metals and energy, are extracted every year, which means that less and less remains, it is unlikely that resources will be exhausted anytime soon, the bank says. Historically, reserves of both oil and metals have tended to rise faster than the depletion rate through extraction. In the case of oil, reserves have tended to remain at 40 years of anticipated consumption. This is because, when companies tally reserves, they tend to include only resources that can be readily extracted, which excludes sizable known resources.

The bank expects that more resources will be discovered, even though they are likely to be lower grade or more remotely located, and therefore more difficult and costly to produce. Nevertheless, advances in extraction technology will likely offset these impediments. The long-term oil price is expected to be US$75 per barrel in real 2008 dollars, a level which will allow economic production from oil sands. The bank expects that the oil price will also average US$75 per barrel in 2009.

Even if the World Bank’s projection turns out to be partly wrong and certain resources do become scarce, the bank says that alternatives will start coming into play. For example, if the pace of oil discoveries declines, the rising oil price will make alternatives such as coal, nuclear, natural gas and renewable energy more attractive, as well as stimulate conservation and technological change. However in such circumstances alternative energy sources will also become more expensive.
The World Bank summarizes its forecast by saying that under reasonable assumptions the supply of commodities is likely to increase rapidly enough over the long run to meet anticipated increases in demand at prices that are lower than the current levels. (The report was issued on November 20, when commodity prices were somewhat higher than now.)

TD Bank economist Dina Cover focuses on short-term prospects for commodities. She has downgraded prospects for the global economy in 2009, projecting growth at a mere 0.5%. The U.S. economy will shrink by 2%, and growth in the Chinese economy will slow to 7.6%. Since the U.S. and China are the world’s largest consumers of many commodities, demand will be hit hard, particularly for oil, coal and industrial metals.

As a result, the TD commodity index is projected to fall by 15% from mid-December levels, for a 60% peak-to-trough decline, and it will bottom in the second quarter of 2009. This may drag the Canadian dollar further down, which should help cushion the effect of falling commodity prices on mining companies.

Energy and base metal prices will decline the most, since both consumer and industrial demand for these commodities will decline. Although some mining companies, notably zinc and nickel miners, have slashed production, demand has fallen much more, so prices will remain under pressure in the short term. For example, the oil price is now expected to bottom at US$30 per barrel.

As for gold, TD forecasts that fears about deflation and disinflation could put downward pressure on prices in the near term, but a projected drop in the U.S. dollar in 2009 will support the gold price.

The global economy will start firming toward the end of 2009 and into 2010, lifting commodity demand and prices. TD projects a 55% rebound in the TD commodity index by the end of 2010, led by more than doubling of the oil price to US$75 per barrel. Excluding energy, the index will rebound by only 22%. Commodity prices are not projected to reach their boom peaks, since global economic growth in 2010 is forecast at a lukewarm 3.2%, substantially below the 4–5% growth rates seen during the boom.

Another factor which will limit commodity price appreciation is lower investment demand, since other asset classes will also rebound, so they will compete for the same investment dollars.

TD projects that oil will cost US$45 per barrel in December 2009, rising to US$75 in December 2010. Thermal coal in Australia will cost US$65 in December 2009, rising to US$100 in December 2010. The silver price will be US$9.60 per oz. in 2009, rising to US$10.50 in 2010. Aluminum will cost US75¢ per lb. in 2009, rising to US$1 in 2010. Copper will cost US$1.50 per lb. in 2009, rising to US$1.80 in 2010. Nickel will cost US$5.15 per lb. in 2009, rising to US$6.50 in 2010. The zinc price is projected at US48¢ per lb. in 2009 and US70¢ in 2010. Uranium oxide is projected at US$52 per lb. in December 2009, and US$65 in December 2010.

TD forecasts that the only commodities which will see price falls between 2009 and 2010 will be gold and newsprint. The gold price is projected at US$815 per oz. in December 2009, falling to US$700 in December 2010.

Gold N.Y. Spot $ 845.70
Silver N.Y. Spot $ 10.86
Lead LME Cash $ 0.3969
Copper LME Cash $ 1.3197
Zinc LME Cash $ 0.5126
Nickel LME Spot $ 4.52
Aluminum LME Spot $ 0.6695
Platinum N.Y. Spot $ 0858.00
Palladium N.Y Spot $ 175.50
Oil WTI Cushing $ 041.90
Natural Gas (Henry Hub)($/MMBtu) $05.68

USD-AUD $ 1.4671
AUD-USD $ 0.6816
CAD-USD $ 0.8147
USD-CAD $ 1.2275
EUR-USD $ 1.3952