COPPER

Since the start of this year the price of the December copper future has more than doubled and reached $2.96 per pound last week in trading at New York's Comex division of the Nymex. Copper fundamentals have been driven largely by two things. Prospects for a rebound in global recovery have led the metal by the nose. With both developed and developing economies undergoing manufacturing rebounds neatly coinciding, investors have been keen to push prices ever-higher. A weaker dollar during the year has also helped.
 
But perhaps a larger factor was the Chinese state splurge on tons of the metal in part to shield an over-reliance on the fortunes of a dollar in light of worsening fiscal fundamentals. The state's ability to lock down copper prices as part of a strategy to endure uninterrupted long-term supply attracted plenty of speculative attention.

In the United States, copper is predominantly used by homebuilders. According to the Copper Development Association builders use around 440 pounds of pipes and wires made from the copper in an average single-family home. So when you consider that real estate stocks had recently more than doubled in price off the market bottom in March, the rally in the price of copper looks appropriate.
 
One wonders whether the copper bulls just dance to the sound of the beat they like to hear. The Shanghai composite has fallen by 20% since its fall began at the start of August. Compare that to an 8% decline to $2.72 in the December copper contract. There is a pretty large discrepancy between the two.
 
One can understand the argument that it really isn't just China that consumes copper and the better fundamentals around the globe will likely support copper's advance going forward. So Tuesday's data for U.S. homebuilding starts was an unwelcome development for copper bulls. We already knew that there is a sizeable inventory overhang in the housing market weighing heartily on house values. We heard one comment on the television over the weekend that some corners even argued that bulldozing some of these unsold sub-divisions would be a meaningful strategy in mending the economy!
 
The fact that U.S. housing starts declined while at such a low level is indeed a worry for copper prices going forward. A 1% decline in the annual pace of housing activity to a 581,000 marked the first decline in a quarter. That copper prices didn't respond more viciously is possibly accounted for by the fact that a 1.7% rise in single-family housing starts within the data acted as something of a buffer. After all, that sector accounts for 75% of the industry.
 
One of the problems now facing copper prices is the challenge posed by the dollar. While we do expect the dollar to demise in the medium term, it's not cracking against the euro at present despite evidence of a rebound in second quarter GDP growth and all the optimism that brings with it in survey evidence such as Tuesday's ZEW confidence data.
 
There seems to be a strong undertone in the market that investors feel the market may have discounted about as much of a recovery as we are likely to see. Much of the gloom has passed us by and as overly-despondent as the market was in March, it's quite possible it became too optimistic about what to expect out of a recovery.
 
Fresh midweek falls for Asian stocks quickly attracted the attention of European and U.S. investors. As fear returns to the market throughout this week and the dollar responds accordingly we could see a little more fallout for industrial metals.

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