One analyst predicts a 70% drop in price

It's not often a major stock or commodity gets set up for "catastrophe," but when it does, I stand up and take note.

Most investors and traders aren't much interested in catastrophe. They won't short a vulnerable asset when a crisis is looming... and they won't buy it just after the crisis... when the asset is very cheap.

This is a shame, but it's why most people lose in the stock and commodity markets. And it's why they're going to miss a big opportunity coming to the copper market soon. Here's the story...

Put simply, speculators, rather than real demand, account for a great deal of the 120% rally in copper prices over the past 12 months. Many of those "hoarders" are in the People's Republic of China.

I started digging into this idea after listening to David Threlkeld, a longtime copper trader and analyst. He recently told Bloomberg that China, the world's largest copper user, more than doubled its imports of refined copper in 2009.

Today, Threlkeld thinks China has three million tons of unreported copper. China consumed about five million tons of copper in 2009. That unreported three million tons would be seven months of supply.

While not all the experts believe China has that much copper stashed away, another source agrees with Threlkeld. I recently spoke with a banking insider who believes that China has about 1.8 million tons of unreported copper.

These Chinese speculators and hoarders are not buying copper to build refrigerators: In 2008, 50% of the raw copper imports turned around as exports. In 2009, it was just 15%. They're buying copper to stockpile a bit and to bet on a price increase. But when stockpilers and speculators get their fill, it only takes a lack of buying to hammer the market.

In addition to hoarding in China, copper stockpiles are soaring in warehouses elsewhere. The London Metal Exchange, the market maker in all kinds of metals, has another 1.2 million pounds in warehouses all over the world. That supply is equal to another three months of Chinese consumption.

In total, there's enough copper out there to supply China's demand for nearly a year and that has Threlkeld worried. He recently predicted copper prices will fall to $1 per pound. That's 70% below today's price of $3.30 per pound.

Even if he's half right, and copper prices fall to $2 per pound, large copper producers like Freeport-McMoRan, Southern Copper, and Teck Resources (TSX: T.TCK.B, Stock Forum) are in for a huge fall. I'm not making this bet yet. With current prices near yearly highs, the uptrend is still strongly in favor of the bulls. But this trend could end quickly.

If you hold stock in the big copper producers I just mentioned, watch your trailing stops. If you're more of a short-term trader, consider getting ready to trade these from the short side.