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How High Can Copper Climb?

By Jim Williams

Copper prices keep soaring as do expectations for the remainder of the year for the red metal.

Copper touched a five-month high in early morning trading thanks in large part to signs of stronger Chinese demand and lingering labor strikes hanging over supply expectations.

Copper jumped 2.21% Tuesday as the International Monetary Fund revised its growth outlook for China, the world's largest copper consumer, up 0.1 percentage point to 6.7% late Monday.

The economic data came after China released figures on its copper imports earlier Monday, which showed an increase in June month-on-month.

“Key level on the upside is $2.8495 on the September futures contract, the February highs,” notes frequent tED contributor Andrew Hecht of Seeking Alpha. “Above there we could see $3 per pound. LME stocks have been edging lower after exploding from under 260,000 tons at the end of Q2 to over 310,000 tons. However, with the Chinese ownership of the LME it is likely that inventory data is manipulated.”

Digging further into the supply side, a recent Reuters poll suggests the global deficit of copper will deepen as more mines in South America are impacted by labor woes.

The analysts polled by Reuters more than doubled their estimates of a global deficit this year to 44,000 tons from 17,000 tons in the previous poll taken back in May. While that bodes well for the price of copper, some expect the situation to turn around next year and the market to turn into a surplus. Economist Amy Li at National Australia Bank in Melbourne is one of them. “We will mostly likely see more disruptions later this year, but they are not to be as severe, and the price impacts should be largely priced in,” Li told Reuters.

The analysts appear to be spot on when it comes to labor issues. One strike was averted overnight as Antofagasta PLC and Barrick Gold Corp.'s Zaldívar mine averted a walkout. But Freeport McMoRan Inc.'s Grasberg mine in Indonesia, the second-largest copper mine in the world, entered its fourth month of strikes Monday – giving copper a prices boost.

“I am friendly to copper here as we have seen recoveries in the prices of many other industrial commodities,” Hecht concludes. “Iron ore has rallied from $52.33 per ton in June to $66.40. Oil has rallied from the June 21 lows of $42.05 to close today at $46.34 on the September futures contract. Even lumber has rallied and the Baltic Dry Index has appreciated to 977 indicating that demand for dry bulk commodities has increased. These are all good signs for copper, but the line in the sand is up at $2.85 and a move above there will be a major event for the red metal.”

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