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Why Copper Is Reeling


As the red metal falls to a seven week low, strategists debate where it goes from here.

Copper is getting crushed.

The metal -- which serves as a bellwether for economic activity given its many industrial applications, from conducting electricity to transporting water and gas -- has now suffered a serious retreat, erasing all its year-to-date gains.

Copper for July delivery, after hitting a closing high of $3.6505 on April 5, has fallen 12.5%.

In addition to the metal, miners have also been hit hard: Freeport-McMoran Copper & Gold (FCX), a copper, gold, and molybdenum mining company, is down nearly 20% in just the past four weeks.

Today, in the early afternoon, FCX is down 5.7% while its competitors, Newmont Mining (NEM) and Southern Copper Corp. (SCCO) are down 2.1% and 5.1%, respectively.

Copper had a banner year in 2009 -- surging 139% -- to finish the year at $3.3275 per pound as investors threw down bets on a global economic rebound, headline-making growth in China, and a weakening dollar.

Now, analysts and metal-heads write that twin worries are pummeling the price of copper: one, increasing concerns over European solvency; and two, hand-wringing over China tightening measures, several of which target the metals-intensive real estate sector.

Tom Pawlicki, the precious metals analyst with MF Global, says that copper is getting hammered due in part to evidence that the Chinese have been stockpiling mountains of the metal. It's also taking a hit from efforts by Chinese central bankers, who are wary of inflation and new asset price bubbles. They're trying to cool off the Chinese economy, which would limit demand for copper.

After all, of the 24 million metric tons of copper consumed globally in 2008, 7 million metric tons were consumed just in China, according to the International Copper Association.

The correction in copper that we're seeing, Pawlicki says, makes sense. "I share these worries," he tells Minyanville. "The market got overextended throughout the second half of last year and into this year. It is due for a correction."

Pawlicki says the price of copper could trade down to $2.80. He expects the average price to be $3.20 in 2010.

The International Copper Study Group (ICSG) just recently released its latest forecast, saying that Chinese demand for copper could fall by 13% in 2010. This is contrast to a 38% uptick in 2009.

An average increase of 6.9% in three major markets -- the United States, the European Union, and Japan -- is expected to be more than offset by that decline in China, according to the ICSG.

Total usage of the red metal, worldwide, is expected to fall 1.5% this year. The refined copper market balance for 2010 could show a surplus of about 578,000 metric tons versus 195,000 metric tons in 2009.

Other metal mavens, however, tell clients that they see this dip in copper prices as a buying opportunity.

In a research note released this morning, Goldman Sachs analysts Allison Nathan and Tiger Chen argued that recent market moves here have been overdone.

The two analysts write that economists at their shop maintain that a funding solution for Greece and other vulnerable nations will most likely be found.

As for China, seeing as how the measures targeting the real estate sector are aimed at stemming price appreciation rather than outright construction, the impact on metals demand is likely at worst neutral and potentially net positive.

The Goldman analysts emphasized that they don't expect material upside in metals prices from recent peaks during the second half of this year. Nevertheless, they write, the current dip could offer investors an attractive time to carve out a position.

Trading recommendations they offer: Buy December 2010 copper; sell December 2011.
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