LONDON Copper prices are set to hit new records over coming years as supply shortages meet strong demand from developing market consumers and investors seeking safety in hard assets, Hermes Fund Managers said on Tuesday.
Benchmark copper prices on the London Metal Exchange hit a record high of $8,966 on November 11, a gain of more than 45 percent since early June when markets were fretting about Greece and sovereign default in euro zone countries.
"We expect prices of copper to rise over the next few years, we believe they will be driven by supply and demand side fundamentals," said Michael Banks, commodities analyst at UK-based Hermes Fund Managers.
Talk of higher Chinese interest rates has damaged sentiment and copper has fallen back towards $8,500 a tonne, Banks said.
"However we view China proactively managing growth as a positive influence on the market. It creates stability and in the long term should extend the copper bull run," he said.
China is the world's largest consumer of copper, accounting for nearly 40 percent of global demand estimated at around 19 million tonnes this year. Copper demand growth since 2003 has been boosted by massive spending on infrastructure in China.
"There will be additional consumption by China and India, while production bottlenecks will increase due to the lack of capital investment," Banks said.
The U.S. Federal Reserve's plan to purchase $600 billion (373 billion pounds) in U.S. government debt to boost economic growth has reinforced investor buying of the metal used in power and construction.
China's State Reserves Bureau and domestic consumers spent much of 2009 buying copper to build up stocks. Rising prices this year have meant consumers using inventories, Banks said.
"China will restock again, but they are price sensitive, they will not stock at any price, only if it is attractive."
Banks thinks $8,000 a tonne would be an attractive price for China's State Reserves Bureau to come back to the copper market. "However internal demand may drive them in at higher levels."
Another source of demand growth are investors. Some use commodities as a hedge against inflation -- expected to be triggered by the large amounts of money pumped into the financial system by central banks and governments.
Large amounts of liquidity could eventually lead to too many people chasing too few goods -- a classic recipe for inflation.
Many investors looking for exposure to commodities have in the past used commodity indices such as the S&P GSCI .SPGSCITR, which use futures markets and don't really change the dynamics of the physical market.
But a new development -- plans to launch physically-backed base metal exchange traded products (ETPs) -- could change that.
A physical copper ETP will reinforce strong demand, Banks said, adding that falling ore grades and lack of investment in new mines and cutbacks at existing mines reinforce supply problems over coming years.
"The global financial crisis did knock out or push back a lot of physical copper production," Banks said.
A proportion of copper production capacity was idled and projects were delayed after prices fell below $3,000 a tonne in December 2008, in the aftermath of the collapse of Lehman Brothers which fuelled fears of a 1930s style depression.
Chile, China and Japan are the world's biggest producers of refined copper. Chile is the world's largest producer of copper ore and while there are other contenders for that top spot, the chances of them taking the lead are slim, albeit for now.
"Other places that produce copper such as the DRC (Democratic Republic of Congo) and Zambia have political problems," Banks said. "They also don't have the infrastructure."
(Editing by William Hardy)