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A number of international brokerage firms are touting copper as a 2010 bull market candidate. In the base metals trade, seeing recommendations from either British or Australian sources seems to give many traders even more confidence in the bull market predictions, perhaps because those two countries have had a history of heavy corporate involvement in base metals mining. Nonetheless, the copper market seems to be able to track economic activity in the developing world, and it has sometimes been able to discount periodic negative impacts from the developed or OECD countries.
Certainly global industrial activity will find it difficult to spring back to pre-sub prime levels, but seeing the Chinese buying more automobiles than the US in the month of January could be a sign that the developing world is capable of making up for an anemic recovery in the US and Europe. It should also be noted that infrastructure spending was a major component of many global stimulus projects, with the majority of the US spending not even getting into the market until later this year. Therefore, what demand might be lost from classic economic activity might be regained through big government projects.
From a shorter term perspective we suspect that some mining activity remains curtailed because miners have only recently seen prices return to the 2006-2008 consolidation high zones and the cost of mining has increased because of higher energy prices, the potential for wage re-negotiations and because local governments are demanding higher taxes or more stringent environmental practices. While $3.00 copper pricing might have been very lucrative prior to 2006, copper miners might eventually need prices above $4.00 to be confident in expanding their production. The general pattern of LME daily stock changes over the last two months has favored the “build” side of the equation, but recent daily declines seem to be breaking that pattern, and that in turn could be a hint that the copper market is set begin to tightening again (see chart).
In short we think that copper has signaled a value zone in the nearby contract above the $3.00 level and that copper prices for December delivery might have an upside capacity of $3.75 to $3.80 in the event that recovery prospects for the developed world improve.
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