Interpac Business and Migration Solutions Melbourne Australia

(November 12, 2010)

COPPER prices have hit a record on the back of the relentless pace of Chinese demand and a potential supply shock from Chile.

China, the world's biggest consumer of the red metal, released data yesterday showing industrial output and capital spending were holding steady even though Beijing has recently taken steps to cool investment in real estate and other sectors.

This sent benchmark futures to a record $US8966 a tonne in London after copper in Shanghai hit 70,150 yuan, or $US10,557.10, a tonne. Comex futures in New York hit $US4.0835 a pound, the highest in 30 months and within cents of a record.

Prices have tripled since hitting their nadir in 2008 in the wake of the financial crisis.

China's economy influences the prices and trade flows of most commodities, but its impact on the copper market is particularly strong.

The fast pace of the country's industrial output points to continuing strength in the construction boom there amid urbanisation and population growth.

Industrial output in October grew 13.1 per cent from a year earlier, slightly below September's rise. Meanwhile, urban fixed-asset investment, a measure of capital spending, rose 24.4 per cent in the January-October period, in line with economists' median forecast.

Copper is used for pipes and wires in buildings, appliances, electronics and automobiles. Harbor Intelligence, a Texas-based consultancy, pegs 2010 China refined copper consumption at 7.5 million tonnes, almost 40 per cent of global demand.

While China's resilience during the global economic downturn kept copper consumption growth going, any additional demand from a pick-up in manufacturing elsewhere is likely to turn the balance of supplies, which now are evenly matched with demand, into a steep deficit in 2011.

"The market is definitely focused on the supply situation," said Catherine Virga, base metals analyst with New York commodities consultancy CPM Group.

These concerns have been heightened as workers at one of the largest copper mines in the world put down their tools last week. The 1551 unionised workers at the Chilean copper mine Dona Ines de Collahuasi went on strike last week, demanding that their wages and benefits keep up with the scorching pace of copper-price increases.

The mine produces about 500,000 tonnes of copper a year, or about 10 per cent of Chile's annual production. The Andean nation is the world's number one copper producer, accounting for about 35 per cent of global output.

Collahuasi has a contingency plan in place to ensure operations continue while the strike -- which entered its seventh day yesterday -- lasts, and a spokeswoman said operations remain normal.

But union leaders dispute that assertion, saying that the mine is running at only 20 per cent of capacity. Mining giants Xstrata and Anglo American own the majority of the mine.

Traders say that due to seasonal softness, customers aren't likely to be affected as long as the strike doesn't drag on. In the meantime, 1500 tonnes of copper that otherwise would have been extracted every day is staying in the ground, further tightening supplies.

The global copper market will be in a slight deficit of 5000 tonnes this year, but that will deepen to a 350,000 metric-ton shortfall through next year, according to CPM Group. Through to the end of last week, above-ground inventories monitored by the Shanghai, London and New York exchanges totalled 540,216 tonnes.

That's only about one-and-a-half weeks of global consumption, Ms Virga said.

Falling warehouse stocks helped support prices in the latest session, with inventories of copper stored in London Metal Exchange warehouses falling 1000 tonnes, leaving them at 362,950.

The premium for Shanghai copper futures over London Metals Exchange futures has widened so much that it's now more profitable for some Chinese buyers to purchase metal overseas and import it than to buy it domestically.

The last time such an arbitrage opportunity opened up was in August.

Gains in Chinese industrial production in spite of those efforts to cool growth are particularly encouraging to copper market participants.

The Chinese numbers were "good...showing that the economy was continuing to expand despite government efforts to rein in growth," MF Global analyst Edward Meir said in a note to clients.