Last week, three-month copper contracts hit £5,537 a tonne on the London Metal Exchange (LME) - the high point since prices collapsed in the early part of September. Prices have subsequently pulled back as Athens teeters on the brink, but copper's vigorous recovery, reported low stockpiles in China and tight supply suggest recent strength could be maintained. It should also support the likes of Rio Tinto, which this week announced a huge investment in the Escondida mine in Chile.
Central to the supply tightness is an overall decline in ore grades; it's an entrenched problem that is taxing mine managers at some of the world's biggest operations. It feeds into higher unit production costs, and shows little sign of abating.
Underlying profits at
Grade problems aside, last week's copper price hit the heights after Beijing announced a series of measures designed to stimulate growth in China's private sector. The Communist Party is keen to create an additional 45m jobs in the economy and a successful stimulus on this scale would invariably drive demand for industrial metals such as copper. The received wisdom is that China, because of its peculiar status as a 'part-command' economy, is able to strategically rebuild its stockpiles of base metals as and when prices move in its favour; a situation aided by a prolonged slump in the US construction sector.
The jury's split on the direction of copper prices. Inventories monitored by the LME have fallen to 30-month lows since the start of the year, which theoretically heralds increased volatility. Given this potential volatility, we would counsel investors to stick to fundamentals. Short of a major recession in the West, copper supplies will almost certainly be in deficit over the course of this year. This benefits the likes of Rio Tinto, which remains a buy at 3,735p.