Scarce demand the achilles heel of copper prices

Copper prices have surged this year, but consumers of the industrial metal say gains do not reflect real demand and that a major correction is on the cards.

Conversations and interviews with consumers of copper - used widely in power and construction - by Reuters journalists for London Metal Exchange week show that many believe price gains have been driven by a flood of investment money.

"There's no demand," said Mostafa Elalaily, manufacturer representative at Chinese copper fabricator Ningbo Jintian Copper Tube. "The price is too high and there is no fundamental reason behind the rally... (It's) not sustainable."

Benchmark copper on the London Metal Exchange trading at $6,225 a tonne is about double the levels seen in early April when markets started to think the worst of the recession could be over and that the global economy could be stabilising.

However, stability does not equal strong growth and consumers say their stock levels are low and that economic uncertainty, despite the vast amounts of stimulus pumped into the economy, could mean they stay low.

Low consumer inventories will be reflected in higher stocks of copper in London Metal Exchange warehouses. LME stocks at above 357,000 tonnes are up nearly 40 percent since the middle of July and the highest since early May.

TOO MUCH COPPER?

French cable maker Nexans, one of the world's largest private consumers of copper, expects the market to show a surplus for the next 12 months. 

"We are not worried about supply or about tension on the market," said Christian Velten-Jameson, Nexans vice-president of finance, treasury and metals.

"We don't see a tension on the physical market, if there was a recovery next year, before the fourth quarter of next year."

A Reuters poll published in July showed the copper market in surplus by 400,000 tonnes this year and 227,000 tonnes in 2010.

Copper prices are expected to average $5,003 a tonne this year and $6,446 a tonne next year, another Reuters survey published on Thursday showed.

However, the accuracy of these forecasts depends on top consumer China, said to account for about 30 percent of global demand estimated at about 16 million tonnes this year.

"We expect Chinese imports to slow down in the rest of the year to 150,000-200,000 tonne range, monthly," Rio Tinto's head of the copper division Bret Clayton said.

LME copper prices are said by some consumers, producers and analysts to be too high for China, which exports a large proportion of its copper products to the United States, the world's largest economy, and Europe.

So, economic growth in the United States and Europe will also be very important for copper prices.

London-based Luvata, one of the world's largest copper fabricators, said earlier this month it will raise output in line with its order books, which are growing slowly relative to the first half.

"We saw an enormous reduction (in orders) due to destocking," said Bob Kickham, Luvata's senior vice president of procurement. "What I don't see is that 20 percent destocking being replaced by a 20 percent restocking going forward."