Chinese copper smelting capacity to expand rapidly but fall short of real consumption in the short to medium term. Almost 2 Mt/y of new copper smelting capacity will come online within the next two years, according to estimates, lifting China’s total copper smelting capacity above 7 Mt/y.

However, China’s real consumption of copper could rise by 9% year-on year in 2010, to more than 7.4 Mt; with utilization rates likely to remain at approximately 80-90% including unforeseen disruption and planned maintenance, there is plenty of room for strong refined imports ahead, and especially in the short term should the current SHFE/LME arbitrage window remain open.

However, the large bonded warehouse inventories will likely be depleted first and we anticipate 2010 import volumes will be lower, at about two-thirds of 2009, or ~2 Mt.

Copper prices dive on reversal in sentiment. The fall was overdue. Prices had got ahead of fundamentals in 2009 and early 2010, betting on sustained Chinese demand growth and a swift return to growth in the OECD economies. But Beijing’s recent measures to rein-in lending sparked fears that its demand for raw materials would falter year-on-year, while recently less than pleasing data from the US and EU has dented confidence in the strength of recovery outside China.

The subsequent sell off by CTAs, system traders and funds saw the copper price fall by about 20% from its high on 11 January, to a low of $6,240/t on 5 February.

Conversely, the US dollar and Japanese yen firmed on safe haven buying, yet their strength came more from the threat of sovereign default in the EU, as well as Chinese credit tightening, than any recovery in their respective economies. The debt risk in a number of EU member nations is a concern and while it remains so we see little possibility of the US dollar weakening, and hence see little support for the copper price.

Short-term outlook on silver

There appears little prospect of copper prices rebounding during and shortly after the Chinese New Year holiday period. Furthermore, short-term indicators offer little support for prices to surprise on the upside.

Total exchange stocks are rising and were 0.76 Mt on 8 February, while LME cancelled warrants at 1% of total LME stocks suggest little will leave in the near future. H1 2010 is shaping up to be a mighty tussle between bears and bulls and hence we expect prices to be volatile, but we maintain our view that H2 will see prices once again rise on OECD recovery and sustained Chinese demand. LME 3-month short-term price: $6,100/t-$7,000/t.

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