A disconnect between the futures market and fundamentals will mean a choppy 2011 but, demand from Asia expected to see copper prices move strongly in 2012

Author: Geoff Candy

Demand, primarily from Asia is expected to help copper prices establish themselves above $10,000 before moving toward $12,000 over the next 18 to 24 months.

But, over the shorter term the risks are to the downside and trade is likely to be choppy.

Speaking on Mineweb.com's Metals Weekly podcast, Leon Westgate, Commodities Strategist at Standard Bank, told Mineweb, " there's a stark disconnect that's opened up between where futures prices are and where the underlying physical picture is.

"For example, in Asia physical premiums are on the floor - you're seeing large inflows of metal into LME warehouses. The Shanghai futures exchange inventory is also significantly higher and the Chinese don't appear to be particularly active or in a rush to come back to the market.

He adds, some of the recent price rises have been predicated on the idea that Chinese buyers could come back after their New Years holiday's and continue where they left off but, this hasn't been the case.

"China is fairly well stocked with copper at the moment and it's a bit of a waiting game going on and really it's a question of ‘do prices hang on here and wait for the fundamentals to catch up, or do the fundamentals, the weaker physical picture - does that drag on futures prices?"

Westgate believes that, as a result of this scenario, prices are likely to average around $9,500 per tonne during 2011 before rallying strongly next year. He adds that over the short term the timing of China's re-entry into the market is key as they still have some room to go with regard to destocking.

"It's really a battle between the financial community and the physical market. Copper is no longer a commodity that's used and consumed - it's a hybrid. Its part financial instrument, part physical commodity and at the moment it's shifting its weight more towards the financial side of its behaviour."

Asked about the possibility of the investment side of the market losing interest in the commodities as the rest of the financial world recovers and investors look once more to other asset classes, Westgate says that it is a problem for the longer term.

"You obviously have concerns about inflation, helping support the commodity. Longer term, once companies are doing better, you've got equity prices doing better, companies are paying dividends, property markets back up off the floor - the key will be interest rates. If real interest rates start to go up, then you may see interest shift out of commodities, not just copper but the likes of gold as well as investors do look for high yielding assets. That's more of an issue, not necessarily this year but certainly end of 2012 as we head into the middle of the next decade - you may see sector rotation and that may have a significant effect on commodity prices or certainly how commodities are viewed."

Source: MineWeb

Link to Article http://www.mineweb.com/mineweb/view/mineweb/en/page36?oid=121189&sn=Detail&pid=102055