Copper: The China Effect

By Shivvy Arora

We’ve been keeping a close eye on copper. The red metal has recently fallen to near two-week lows. But as we’ll see, this losing streak is likely to be a temporary pullback

As the world’s largest consumer of copper, China’s feverish stockpiling pushed up the red metal’s prices. But this inventory build-up was guided by copper being cheap and an aggressive focus on hitting economic growth targets for 2009.

Take a look at today’s chart. It shows copper’s spot prices (in dollars) for the past six months. You can see the near-60% surge in the year-to-date. Also note the metal’s recent short-term pullbacks.

Beijing buying helped copper prices surge – and now we’re seeing small pullbacks.

Source: Kitco

We previously drew a resistance line set by previous highs at just under $2.20. This is now acting as a ‘support level’. If copper falls below this, we need to watch out for a larger drop.

Copper’s downward correction isn’t likely to last very long and it shouldn’t move too deep. While global demand for the metal remains down on weak economies, China's reserve building won’t burn out.

Keep in mind that China’s copper imports could slow as the gap closes between London Metal Exchange (LME) and Shanghai rates. This makes it less profitable for China to import the metal. But we believe that the emerging market’s massive stimulus package and drive for growth will keep demand buoyant in the medium term.

Disclosure: No positions