Copper prices turn red hot on supply deficit, weak dollar
Sharad Matade 02 February 2011

Aluminium also edges higher, signalling better-than-expected recovery in the US, Europe and continuing Chinese demand

Prices of base metals, mainly copper, are likely to continue to climb on rising demand, which is seen as an indication of a recovery in the US and European economies, and a weak dollar.

Copper prices are surging towards the $10,000 mark, after touching $9,840 a tonne on the London Metal Exchange (LME) on Tuesday, and analysts suggest that the rally could take prices over the $11,000 a tonne level if the greenback stays weak, robust demand continues from China and manufacturing activity improves in the US.

At its meeting recently, the US Federal Reserve decided to keep interest rates at near-zero levels as the pace of economic recovery in the US has been slow and any attempt to tinker with credit growth, or curb liquidity, could hurt revival in the world's largest economy.

"The conditions are in favour of base metals, particularly copper," an analyst at a Mumbai-based brokerage said. "There is big demand for the red metal, whereas there is a supply deficit. The Fed's recent decision not to change interest rates is also weakening the dollar and this has aided the upside. Sentiment has also improved after the US and China posted a growth in their manufacturing index. We should not be surprised if copper touches the $11,000 a tonne level."

Manufacturing activity in the US and China-both major base metal consuming economies-has been inching northwards. According to the Institute for Supply Management (ISM), index of manufacturing activity in the US rose to 60.8 in January, from 58.5. China's PMI (Purchasing Managers' Index) has also remained strong in the last month.

The HSBC China Manufacturing PMI edged up to 54.5 in January, from 54.4 in December, while the official China Federation of Logistics and Purchasing (CFLP) says its PMI dropped to 52.9 in January, from 53.9 in the previous month. The Market PMI for the eurozone rose to 57.3 in January from 57.1 in December. Any value above 50 for the PMI reflects expansion in the manufacturing sector.
 
China, which consumes about 40% of global copper that is produced, is expected to grow by 9.3% this year.

The Fed's decision not to change interest rates has weakened the dollar further and this has also contributed to base metal prices going up. Today, the dollar index was down to 76.95, its lowest level since November.

A growing deficit of copper has also fuelled prices in the international market. JP Morgan Securities has estimated that the copper deficit would be between 500,000 tonnes and 600,000 tonnes.

In the case of aluminium, while supply is not expected to outpace demand, the price is expected to follow the copper trend on account of the weak dollar and high crude oil prices. Since the Fed announced its rate policy on 26th January, the price of aluminium has surged on the LME. Yesterday, the price of the white metal hit $ 2,530 a tonne, the highest since September 2008.

"Its common (to see) aluminium and zinc follow copper. Although this year supply would be more than demand, the prices of aluminium will also increase, but not as much as copper. A weak dollar and high crude oil prices would help aluminium to maintain its price momentum," the analyst said.

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