Copper down, but not out for the count

LONDON Thu May 27, 2010 1:52pm BST

An interior view is seen of the copper plant of the Norilsk Nickel company in Russia's Arctic city of Norilsk April 16, 2010. REUTERS/Ilya Naymushin

An interior view is seen of the copper plant of the Norilsk Nickel company in Russia's Arctic city of Norilsk April 16, 2010.

Credit: Reuters/Ilya Naymushin

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LONDON (Reuters) - Damage to copper demand from Europe's debt crisis is likely to hurt prices of the metal, but that could be a buying opportunity because the market is tight and consumption in top consumer China is still strong.

But some think a weak U.S. housing market and a prolonged period of turmoil in Europe could wreck longer-term prospects for the metal used widely in power and construction.

The short-term worry for investors is that Europe's debt problems, triggered by Greece, could create a global liquidity crisis similar to that seen after the collapse of Lehman Brothers in 2008, with knock-on effects for economic growth.

"With Greece and things like that there is potential for more downside ... But beyond three months through to the end of the year we could easily see $7,500," said Michael Banks, analyst at fund manager Hermes Commodities.

"China is planning to build 6 million units of social housing, that will continue to sustain copper demand even in the face of rate hikes and policy tightening," Banks said.

Hermes Commodities does not rule out copper rising to a record high later this year.

Perceptions of stagnant Chinese demand combined with European chaos last week helped push the copper price down to $6,415 a tonne -- a fall of nearly 20 percent since the year high above $8,000 a tonne seen mid-April.

The metal hit a record high of $8,940 a tonne on July 2, 2008. Benchmark copper on the London Metal Exchange was trading at around $6,900 a tonne on Thursday.

EURO/DOLLAR PARITY?

Credit downgrades for Greece, Spain and Portugal and worries about sovereign default have hit the euro, which is hovering near recent four-year lows.

"Most of the smart money we speak to says the euro could very easily go below $1.20," said Randy North, a base metals trader at RBC Capital Markets. "If that happens, you'll probably see base metals testing the lows they hit last week."

A stronger U.S. currency makes commodities priced in dollars more expensive for holders of other currencies.

Some expect to see the single currency at parity against the dollar within the next year.

"I wouldn't be surprised to see the copper price with a '5' in front of it, but it won't stay there for too long," said Robin Bhar, analyst at Credit Agricole, adding that robust Chinese demand over coming years would underpin copper prices.

China is said to account for between 30 and 40 percent of global consumption estimated at around 19 million tonnes this year.

Moves by China to slow growth and rein in price pressures have spooked the market, one reason why Chinese imports of refined copper fell in April.

"Inflation concerns have seen China impose restrictions on bank lending. We are trading copper tactically from the short side," said John Brynjolfsson, chief investment officer at fund manager Armored Wolf.

"Housing in the developed world is going to be flat on its back for some years, if not decades ... There is speculation that consumer spending in the U.S. has been driven by homeowners spending their mortgage payments."

That could mean a rise in the rate of repossessions in the United States, the world's largest economy and second-largest copper consumer, despite recent data showing signs of economic stabilisation, perhaps even recovery.

However, others are more confident that when the market is freer of speculators, robust fundamentals will be more obvious.

Looking at the open interest on copper contracts -- down at around 270,000 lots or 6.76 million tonnes from about 290,000 lots or 7.23 million tonnes in the middle of April -- that awareness could come sooner rather than later.

"Sometimes price discovery is overweighed by speculative activity," said Shawn Hackett, president of U.S.-based Hackett Financial Advisors. "We are probably getting to an area where supply/demand factors are going to be price supportive."

One of those factors is stocks of copper, which in LME warehouses are down 15 percent since the middle of February to below 480,000 tonnes.

"We will again see large stock drawdowns. The market will move into deficit in the second half of the year," Bhar said.

(Additional reporting by Chris Kelly in New York, Editing by Sue Thomas)

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