Copper will lead a rally in base metals into 2011 as increased consumption cuts stockpiles and weaker currencies spur investment demand for commodities, according to Morgan Stanley.
“There is a fundamental aspect to this rally in addition to what’s happening to the U.S. dollar,” Peter Richardson, chief metals economist at Morgan Stanley Australia Ltd., said in an interview. “I rank copper first,” said Richardson, who’s studied metals for almost 20 years. He also backed tin, which touched a record yesterday, and nickel, up 32 percent this year.
Copper has surged this year, trading within 1 percent of a record yesterday, as the global economy recovered from the worst recession since World War II and the dollar fell. Refined-copper output will lag behind demand next year for the first time since 2007, the International Copper Study Group has said.
Copper, used to make pipes and wires, has the “potential to have a structural shortage of supply for longer than any of the other metals,” Richardson said yesterday. There’s been underinvestment in mine capacity over the past decade and a “significant problem” of declining ore quality, he said.
Three-month copper futures on the London Metal Exchange traded at $8,788 a metric ton at 4:22 p.m. in Singapore compared with the all-time high of $8,940, set in 2008. Futures in New York were at $3.9995 per pound, 18 percent higher this year.
Morgan Stanley joined Goldman Sachs Group Inc. last month in raising its 2011 price target for copper by 5 percent to $3.60 a pound and the 2012 forecast by 10 percent to $3.80 a pound on “resilient Chinese demand” and a slumping dollar. Goldman Sachs expects copper to trade at $11,000 a ton in a year.
The weakening dollar, driven by the Federal Reserve’s program of additional bond buying, or quantitative easing, has helped spur investor demand for commodities, including metals, according to Everbright Securities Co. analyst Wang Qianming.
The CRB commodities index has rallied for 11 weeks, the longest streak since 1977, since Fed Chairman Ben S. Bernanke indicated in August he was considering further easing. The Dollar Index has lost 13 percent since June 7, this year’s peak.
Global manufacturing indexes last month also underpin stronger commodity prices, with both China and the U.S. “surprising to the upside,” Richardson said. “ The strength of the rally reflects real growth.”
Factory output in the U.S. expanded at the fastest pace in five months in October, while manufacturing in China grew at the fastest pace in six months the same month, data on Nov. 1 showed. China and the U.S. are the world’s two biggest copper consumers.
In Germany, Europe’s largest economy, the manufacturing gauge jumped to 56.6 from 55.1 in the previous month, while India’s factory output in October rose to 57.2 from 55.1 the previous month.
“What has been really quite striking has been Germany and India, so we’re not just talking about a rebound in the U.S. or China, but quite a broad-based picture of strength in manufacturing and industrial production,” he said.
Copper’s “supply-demand deficits look set to grow on emerging-market demand strength and improving demand from developed economies,” Goldman’s analysts including Jeffrey Currie wrote in a note yesterday. “We do not believe that the market is fully pricing these shortages.”
China’s demand has been slowed by higher prices as rising stockpiles, falling premiums, rising treatment fees and increasing scrap supply added to signs of slowing consumption, according to Ren Gang, an analyst at Maike Futures Co.
“At $4 copper, we’re getting quite concerned about demand destruction,” Richardson said. “If you want to affect demand quickly you pull out of the market and Chinese traders are the best there are at that.”
Tin futures in London, which reached an all-time high of $27,500 a ton yesterday, traded today at $27,200. The nickel contract was at $24,400 a ton.