Short-term vs. Long-term + 1 customerSupply premium
The premium commanded by prompt delivery copper over three months delivery was at an 8-1/2-year high of $240 in London, with LME warehouse stocks of the metal falling 1,000 tons to 38,300 tons -- a level last seen in July 1974.
Total world stocks, held by producers, consumers, merchants and all market warehouses, are some 670,000 tons, equivalent to less than three weeks of demand.
At the start of 2004 world copper inventories were 1.5 million tons.
The LME spot premium echoed that scarcity of nearby supply. Typically the cash price is at a discount to reflect the cost of storing and financing metal for forward delivery.
"The real bottleneck is in readily available smelting capacity, which has restricted the availability of LME grade copper," Meyer said.
"While there remains some under-utilized smelting capacity in the world, much of this spare capacity is in relatively inaccessible locations."
Tokyo traders said fund managers might be reshuffling their portfolios after recent rises in long-term U.S. bond yields and only modest gains by Wall Street stocks.
The LME, along with precious metals and energy markets, posted strong price gains on Wednesday on the view that funds were shifting back into raw materials, traders said.
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Now, the long term:
Most participants agree the inventory situation is temporary and copper will end the year below $3,000/ton.
Hynes, for example, forecasts a 10%-15% decline in prices from current levels over the remainder of the year.
More bearish market watchers, such as ABN Amro analyst Nick Moore, expect a 30% decline to around $2,425/ton by year-end.
Moore's view is supported by International Copper Study Group estimates of a 5.5% fall in global copper demand in the first quarter, with refined supply up 4.1%, resulting in a surplus of 25,000 tons versus a 354,000-ton deficit in the same period last year.
"Given that many of the planned smelter closures for 1H05 are now complete, we expect a marked increase in refinery utilization rates and hence even more refined copper over the next few months," he said in a recent report.
Therefore, the question is when, rather than if, inventories will be replenished and prices resume their long-term downtrend.
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Remember, boasting about today's copper price is pointless since Ivanhoe and Entree haven't mined anything in Oyu tolgoi + Copper Flats and won't until 2008-2009ish. The only upside is that it shows demand is there, but from who? Remember Barrick Gold pulled out of the project because of "technical reasons" but he also said much to Friedman's dismay that in his experience where there is a supplier with only one customer (China), the rate of return on the project suffers because of lack of bargaining power. Albeit they have been talking with Japanese trading houses, however the bulk of the sales in my opinion will be to China.