By Eric Onstad
LONDON, Jan 29 (Reuters) – Copper’s red-hot run to above $14,000 a metric ton on Thursday leaves investors facing a decision over whether or not to chase the market higher.
Benchmark copper on the London Metal Exchange jumped 11% to a record $14,527.50 a ton in a rally fuelled by speculators, with momentum spurring yet further buying.
It was the biggest one-day gain for LME copper since November 2008, which traders said was fed by short-covering.
BEARISH INVESTORS WRONG-FOOTED
Those bearish investors were caught out, having expected a pullback after warnings that high prices were not sustainable due to high inventories and weak physical demand.
But many funds remain bullish, seeking physical assets to offset a weaker U.S. dollar and geopolitical tensions.
Unlike gold, however, which has also soared to record highs, copper depends on industrial demand, which has already started to wither at the elevated prices.
Some institutions are also likely to pull back, leaving a thinner market prone to volatility.
“When things go exponential, a lot of the banks start to withdraw due to their risk tolerance. The volatility just makes it brutal to try and trade it,” said Dan Smith, managing director at Commodity Market Analytics.
“I would be quite nervous about where we’re going to go in the short term. You’re going to get demand disruption, so it does suggest that it’s not very sustainable.”
PHYSICAL DEMAND WEAK IN CHINA
In top metals consumer China, where speculators have been at the forefront of the rally, demand for physical metal is weak.
The price that Chinese consumers pay on the spot market has slid to a discount of 170 yuan a ton to the Shanghai Futures Exchange futures price, which has also soared to record highs.
That compared to a premium of 200 yuan on January 15.
“I don’t believe that $14,000 is sustainable at this juncture and while you never know how high it might go I think a correction is on the way,” said a trading source, who declined to be identified.
The upcoming break in China for the Lunar New Year holiday may be the catalyst for a correction, said Alastair Munro, senior base metals strategist at broker Marex.
The current market trajectory can be compared to that in 2004-2006, when China was buying up copper as part of its industrialisation drive, he said in a note.
“Back then we saw very similar moves and which saw a retracement from 6th Feb 2006,” he said. “In which case we get through month end and those money flows and then pause.”
For the Chinese New Year, SHFE will have no evening session on February 13 and remain closed until resuming on February 24.
(Additional reporting by Tom Daly; Editing by Alexander Smith)
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