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Copper Off 20-Month Highs: What's Next?

Copper futures on the London Metal Exchange cooled on Wednesday, trading just below $8,000 a ton.

NEW YORK (TheStreet) - Copper futures on the London Metal Exchange (LME) cooled on Wednesday, trading just below $8,000 a ton, after having soared to a 20-month high the previous day as concerns mounted whether fundamentals can sustain such high prices.

Copper for May delivery on the LME fell $5 to $7,985, after touching $8,010 in the previous sessions, its highest since August 2008.

Freeport McMoran Copper & Gold

(FCX) - Get Freeport-McMoRan, Inc. Report

ended flat at $87.33 in trade on Tuesday, while

Southern Copper

(SCCO) - Get Southern Copper Corporation Report

closed at $34.49. Meanwhile,

Teck Resources


closed at a 52-week high of $46.63.

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Experts attribute the price rise to positive economic news flow over the past week including the U.S. ISM manufacturing and U.S. employment data in addition to Chinese PMI data.

LME inventories stood at 512,575 metric tons as on Tuesday, unchanged in the last three business days.

Revised Guidance

As copper prices have surprised the market during the first quarter, Chile's central bank joined a wave of analysts, raising its 2010 copper price guidance by 15 percent on Tuesday to $3.10 per pound (lb), or approximately $6,834 a ton from its previous forecast of $2.70 per lb. The bank attributes this revision to China's continued demand and improving economic conditions in developed markets.

Meanwhile, Codelco, the world's largest copper producer, reaffirmed that the company's output will increase slightly this year over the 1.7 million tons it produced in 2009, despite February's earthquake disrupting production.

"Copper demand will increase this year, fueled by Chinese use of the metal along with an economic recovery in the U.S. and Europe," chief executive Jose Pablo Arellano told reporters at the CRU/CESCO copper conference Monday.

The company plans to invest $2.3 billion this year to offset output from older mines, Arellano added. The producer is getting all the backing it needs from the Chilean government. Chile plans to revise more than $10 billion of projects to expand output at Codelco. "The government will look for creative ways to raise cash for projects," Mining Minister Laurence Golborne said Monday in an interview with Bloomberg.

Mixed Outlook

The rapid increase in price from last year's lows of below $3,000 a ton has left traders and investors concerned. Commodity traders in Asia feel that the prices may be due for a sharp and painful correction because China, which is said to have fueled this increase in price, already has more of the metal than it needs.

Traders in South-East Asia reckon that even if the Chinese economy continued to storm ahead at its present pace, copper demand was likely to dwindle because many huge construction projects which use copper wiring extensively had run their course. A fall in demand is also expected from Chinese utilities, responsible for more than half the country's copper needs.

Another reason attributed to possible fall in prices is the large quantities of copper stocks held in Chinese warehouses and not counted among the official stocks of the Shanghai exchange. Shanghai inventories meanwhile stood at 153,589 metric tons as of week ended April 1, down from the 52-week high of 169,101 recorded during the week ended March 18.

However, Bulls reckon that Chinese consumer spending which is the strongest in the world will not let prices fall significantly. Property prices continue to rise and new buildings require miles of copper wiring, which should help to support the price, they say.