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For much of the past three years, the copper market has been a very solid leading indicator of where the economy was heading. While some might suggest that the mid July rally points to a possible recovery ahead, it is more likely that the market reached an undervalued level below $2.80 and it needed a corrective bounce. The subsequent rally from the sub $2.80 low to the $3.10 area was accomplished at least partially on the back of a gradual tightening of supply at the exchanges, but it was also partially forged off speculation of a recovery in the wake of a reduction in European contagion fears. In looking at daily and weekly changes in world copper exchange stocks, the LME has shown a very definitive pattern of daily declines. The Shanghai exchange has also seen a tightening of supply. Since March 3rd when LME copper stocks began to decline in earnest, that exchange has lost approximately 131,650 tons of copper and saw declines on 87 out of 97 days.
Some might even suggest that changes in Shanghai copper stocks are even more critical to world copper prices, as China has become a dominating demand force in the market. Therefore seeing Shanghai copper stocks drop in 8 of the last 10 weekly readings for a total decline of 60,902 tons would seem to suggest that China is still growing or that China has for some reason decided to reduce its buffer stock of copper. It should also be noted that the International Copper Study Group last week put the world copper market in a 60,000 ton deficit in the month of April, and that highlights a market that has remained tight even in the face of some rather slow economic activity. In the end, we would suggest that copper is a commodity market that should sense the end of the slowing first and in turn see the biggest reaction to a return to positive growth expectations.
However, with December copper recently climbing back above $3.10 and those prices sitting more than 10 cents off the early July lows, we would caution traders to buy copper cheap and avoid paying up near the upper end of the last two months’ trading range. In our opinion, the copper market is likely to encounter another disappointment in the lead-up to and through the next US Unemployment Report, and the realization of a sluggish US economy is certainly capable of knocking December copper back down to the $2.89 level. While the US and European economies might not be able to return to the robust growth seen prior to the sub-prime crisis, seeing the US and Euro zone become less of a drag on global demand could make a late July or early August correction in copper a chance to get in on what could be a pretty solid uptrend through the end of this year.
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