An Insight Into Copper

AN INSIGHT INTO COPPER
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CONTENTS
Introduction
Factors Affecting Copper price
Supply & Demand of Copper

The Volatility of Commodity
Prices
The Effect of Rising Copper Prices
World resources
Substitutes
Technical View
Composite Indicators
Short Term Outlook
Long term Outlook
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Introduction
Copper was the first mineral that man extracted from the earth and along with tin gave
rise to the Bronze Age. As the ages and technology progressed the uses for copper
increased. With the increased demand, exploration for the metal was extended
throughout the world laying down the foundations for the industry as we know it today.
Copper is the third largest consumed metal after steel and aluminum in the world.
Copper is used as electrical conductor, construction material and as components in
telecommunications and alloys. Copper is an excellent conductor of electricity, as such
one of its main industrial usage is for the production of cable, wire and electrical
products for both the electrical and building industries. The construction industry also
accounts for copper's second largest usage in such areas as pipes for plumbing,
heating and ventilating as well as building wire and sheet metal facings.
World copper production
Region %
Asia 43
America 32
Europe 19
Africa 4
Source: WBMS www.world-bureau.com Oceania 2
Total 100
Industrial consumption
Industry %
Electrical/Electronic 42
Construction 28
Transportation 12
Consumer/General 9
Source: Standard CIB Global Research Industrial
9
www.standardbank.co.za Machinery
Total 100
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Factors affecting copper prices

The wide production base means there are numerous factors that can affect production
and therefore prices. In North and South America, production is often affected by labor
unrest, in parts of Asia and Africa production can be affected by political unrest; take for
example the closures of the Bougainville mine in Papua New Guinea and the
decimation of production in Zambia.
In addition, weather is an important factor affecting supply, with floods and droughts
either hitting the production process or the transport of raw materials.
New production also takes years to commission as the scale of mining is large, it takes
enormous financing, requires endless environmental permissions and needs extensive
infrastructure as well. All these factors make it hard for the market to balance supply
and demand.
With such a large and diverse market it is little surprise that copper's fundamentals are
continuously changing and as they do, so does the price. The copper prices change
constantly as the market attempts to balance supply and demand at any given time.
These price fluctuations generate risk and opportunity to different participants in the
market and the metal exchanges around the world provide the means for all those
involved with the market to either hedge their risk or take on risk as an investor or
speculator.
Below is a table which depicts supply and Demand of Copper by major Copper
producing and consuming economies, Their Supply and Demand and their expected
Demand and Supply, Their expected Supply demand in next half of 2011.
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 The world’s Demand of and Supply of copper
Demand
Global consumption was reported at
17,800 (Kt) in 2009, which increased
10.1% to 19,601 (Kt) in 2010. Many
people would argue that at some
point copper prices will become so
extreme that it will eventually lead to
demand destruction. Currently
Barclays Capital does expect global
consumption to grow about 4.2% in
2011. In aggregate the expected
copper shortfall is anticipated to be
about 825 (Kt) in 2011. In other
words, copper demand will exceed the supply and as such inventories are expected to
be lower at the end of 2011 from where they stand currently.
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Supply
Global production of copper was 18,256 (Kt) in 2009 and increased to 19,152 (Kt) in
2010. While this was a 5% to 6% increase year over year (depending on how you
account for the “disruption allowance” factor) it is below the market expectation for
production growth which was 8%. While this might seem inconsequential, it is actually a
substantial shortfall. Global copper production increased only 5% to 6% in 2010 despite
a 46% increase in the average price of copper from $2.34/lbs in 2009 to $3.42/lbs in
2010. Talk about inelastic supply! Currently Barclays Capital projects copper production
to increase 2.3% to 5.5% (depending on global disruptions expectations).
Copper Supply Constraints

Copper is similar to many other commodities in that the vast resources are typically
located in countries that are developing politically and economically. Oftentimes these
countries are prone to shocks such as labor strikes. It seems fairly logical to argue that
as the flat price of copper (i.e. cash copper prices) rise further and further, “labor”
becomes increasingly concerned that they are not getting what they see as their fair
share of the prosperity. As such, strikes, sometimes violent and very disrupting, can and
do occur. If copper at $3/lb provides temptation for labor to take a stab at increased
wages, copper over $4/lb makes that temptation far greater. Many leading mines across
the globe that were developed over two decades ago are yielding ore with less and less
metal content. Production at Escondida, the world’s largest copper mine, is anticipated
to drop as much as 10 % in the next 12 months because of lower grades.
Due to shortage of domestic mines and a low percentage of productivity in the existing
mines, India is already suffering loss in the level of production for Copper. Rising prices
are attracting companies to start newer venture but copper mining projects take a long
time to commence. Hence, no new major copper supply will be seen in 2011 further
tightening the inventory situation.
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The China and India effect
Growing economies e.g. China and India are among the largest demand sources for
industrial metals since the beginning of the last decade, and are responsible for at least
30% to 45% of all base metals consumption. India accounts for 3% of the global output
but still has to depend completely on the copper ore imports. China’s State Reserves
Bureau (SRB) will buy more refined copper in 2011 even as the prices hover near a
record high, though the buying would not be that aggressive.
Overall, India and China’s copper imports are expected to go up this year and demand
is also likely to rise by 7% in 2011 from last year. South Korea’s Public Procurement
Service is also looking to raise copper stocks to 46 days of consumption in 2011 from
2010’s 42 days.
The pace of depletion in copper inventories at London Metal Exchange monitored

warehouses is also indicative of a very strong demand outlook amid tight supply. In the
past one year, copper stocks at LME-monitored warehouses have declined nearly 25%.
The world’s growing economies may choose to increase interest rates in an attempt to
curb liquidity and control inflation. The People’s Bank of China has already increased
key one-year lending and deposit rates by 25 basis points effective from 18 th Feb
2011. Another fear is of the substitution.
Rising copper prices will encourage use of other metals in plumbing & construction.
Substitution will pull out around 3% of the copper in 2011. But at the same time, new
usage like electric and hybrid cars should make up for the loss of demand caused by
substitution. Since the fundamentals of the metal are strong, such negative factors
could only drag copper prices down for a short period. Most copper ore is mined or
extracted as copper sulfides from large open pit mines in copper porphyry deposits that
contain 0.4 to 1.0 percent copper. Over 40 per cent of world copper supply comes from
North and South America; 31 per cent from Asia and 21 per cent from Europe.
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Estimated Copper Consumption versus
Domestic Production – China
 The volatility of Commodity Prices

As we have seen, price volatility stems from a lack of responsiveness of both demand
and supply in the short term, i.e. both demand and supply are assumed to be inelastic in
response to price movements.
The low price elasticity of demand for copper usually stems from a lack of close
substitutes in the market. For some products and processes, aluminum or plastic may
act as a substitute to copper for some uses, but there are costs and delays involved in
switching between them.
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The elasticity of supply is also low. Supply is usually unresponsive to price movements
in the short term because of the high fixed costs of developing new extraction plants
which also involve lengthy lead-times. If existing copper mining businesses are working
close to their current capacity then a rise in world demand will simple lead to a reduction
in available stocks. And as stocks fall, so buyers in the market will bid up the price either
to finance immediate delivery (the spot price) or to guarantee delivery of copper in the
future (reflected in the futures price). It can take huge price swings in the market for
supply and demand to respond sufficient to bring the market back to some sort of
equilibrium.
The Effects of Rising Copper Prices

The demand for copper will continue to remain strong provided that the global industrial
sectors continue to expand production. But if price remain high then we can expect to
see some shifts occurring. For a start, copper can be recycled although the costs of
doing so are often high and there are fears concerning the negative externalities arising
from the pollution created by trying to recycle used copper. These external costs include
atmospheric emissions from recycling plants and waste products dumped into rivers.
Nonetheless price theory would predict an increase in demand for scrapped copper and
perhaps a substitution effect away from copper towards aluminum. And in the medium
term high prices and emerging new technologies may cause an even bigger shift in
demand away from copper based products. Plastics provide lower material and
installation costs for businesses. And the take off in wireless technology and fiber optics
will also have an impact.
And higher prices might also be the stimulus required for an expansion of copper ore
production as supply responds to the incentives of increased potential revenues and
profits. In recent years, copper mining production has fallen short of expectations. But
as with any market, if the price is high enough suppliers will eventually respond!
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World Resources: A recent assessment of U.S. copper resources indicated 550
million tons of copper in identified (260 million tons) and undiscovered resources (290
million tons).8 A preliminary assessment indicates that global land-based resources
exceed 3 billion tons. Deep-sea nodules were estimated to contain 700 million tons of
copper.
Substitutes: Aluminum substitutes for copper in power cables, electrical equipment,

automobile radiators, and cooling and refrigeration tube; titanium and steel are used in
heat exchangers; optical fiber substitutes for copper in some telecommunications
applications; and plastics substitute for copper in water pipe, drain pipe, and plumbing
fixtures. it seems logical to assume that demand for copper could go way down in
coming years. After all, conductors, power cables and other wires are being made with
aluminum, which is also a very good conductor of electricity, and is lighter and much
cheaper. But how likely is it that everyone will all of a sudden stop using copper in lieu
of aluminum? The bears argue that copper is far heavier and more expensive than
aluminum. True. But that has always been the case. And in recent years, you can bet
that anywhere it was feasible to replace copper with aluminum it was done. That’s
evident by the rise in aluminum prices.
There is no doubt whatsoever that aluminum has replaced copper in wires, conductors
and various electrical parts – especially as copper prices have more than tripled
recently. But the increase in aluminum has not had any major effect on the demand for
copper. In fact, demand for both metals has soared in tandem. One has not risen at the
other’s expense. And anyone who would have you believe that you could one day stop
using copper altogether in lieu of aluminum should consider this one fact: If you took all
the aluminum stockpiles in the world, it would only be enough for nine days of global
consumption. In other words, even if aluminum could be used to replace copper in every
function under the sun (which it could not) we would only have enough to last nine days.
Copper is in not in the danger of being totally replaced just yet.
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The developing world needs both metals – not just one. In next section, we have
illustrated our technical view on Copper by presenting its various averages, Fibonacci
retracement levels, Expansion levels and in-depth analysis using various technical
indicators on different time frames of charts supporting our technical view, and on the
basis of these our technical target on Copper.
TECHNICAL VIEW
Copper CMP - $399.75 Target Price - $510
Moving averages
Moving Averages 20 Day 50 Day 100 Day 200 Day
Daily $415.10 $426.00 $433.40 $414.53
Weekly $434.27 $384.81 $343.80 $315.38
Fibonacci retracement levels

SCRIPT 0.0% 23.6% 38.2% 50.0% 61.8% 100.0% 131.8%
Copper $125.08 $195.46 $240.18 $275.36 $310.55 $427.00 $522.45
Expansion levels
SCRIPT 38.2% 61.8% 100% 138.2% 161.8%
Copper $364.40 $421.92 $516.04 $608.86 $666.38
Monthly Pivot
SCRIPT R4 R3 R2 R1 P S1 S2 S3 S4
Copper $577.58 $521.18 $464.78 $432.27 $408.38 $375.87 $351.98 $295.58 $239.18
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Composite Indicators Signal Strength Direction
TrendSpotter Sell Maximum Weakening
Short Term Indicators
7 Day Average Directional Indicator Sell Average Weakening
10 - 8 Day Moving Average Hilo Channel Sell Weak Weakening
20 Day Moving Average vs Price Sell Strong Weakening
20 - 50 Day MACD Oscillator Sell Weak Strongest
20 Day Bollinger Bands Hold - Rising
Short Term Indicators Average: 80% Sell
Medium Term Indicators
40 Day Commodity Channel Index Sell Average Weakening
50 Day Moving Average vs Price Sell Strong Strengthening
50 Day Parabolic Time/Price Sell Average Weakest
Medium Term Indicators Average: 100% Sell
60 Day Commodity Channel Index Sell Strong Weakening
100 Day Moving Average vs Price Sell Average Strengthening
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Support/Resistance Levels Price Key Turning Points
7.3365 Price Crosses 18-40 Day Moving Average
14 Day RSI at 80% 5.6698
14 Day RSI at 70% 4.8351
13 Week High 4.623
52 Week High
4 Week High 4.398
4.3476 38.2% Retracement from 13 Week High
4.336 Price Crosses 40 Day Moving Average Stalls
4.2625 50% Retracement from 13 Week High/Low
4.2531 Price Crosses 40 Day Moving Average
4.2352 14-3 Day Raw Stochastic at 80%
4.1774 38.2% Retracement from 13 Week Low
4.1673 14 Day RSI at 50%
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4.0642 3-10-16 Day MACD Moving Average Stalls
Current Price 3.9605 Current Price
3.9396 14 Day %d Stochastic Stalls
4 Week Low 3.902
13 Week Low
3.8977 14 Day %k Stochastic Stalls
3.8407 3-10 Day MACD Oscillator Stalls
14 Day RSI at 30% 3.7751
14 Day RSI at 20% 3.2849
52 Week Low 2.7725
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Short Term Outlook:-

If we look at Copper weekly chart and simply apply a Fibonacci retracement of its recent
uptrend starting from May 2010 to its peak of $464.10 in Feb 2011, we can see that
Copper has corrected 38.2%. Further, the RSI is at 45.15 on weekly chart and is on
over all downtrend taking resistance of trendline. Below 50 RSI indicates a bearishness
of Copper in near future. Copper from here have a downside and it can correct to 50%
that is at $368 where we meet our long standing support trendline which is drawn from
the troughs of December 2008. In our short term outlook we expect Copper could
correct further and may test the level of $368 - $370.
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Long Term Outlook:-

In our long term outlook for copper, we are bullish on the upside and see 15% – 20%
return once it completes its short term correction. We have seen an expansion of coppr
prices from $125.35 to $365.50 from where it retraced to $270 and headed for its next
uptrend. Currently, Copper is ranged between 61.8% to 38.2% and is seeing a
correction. From here Copper on the maximum can test the level of $368 - $370 and
from then create a next uptrend to its 100% expansion which coincide with our target of
$510- $520.
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In our next chart, we have shown the expansion of copper from its 2nd rally starting from
$271.96 to $464.10. After making a peak at $464.10 it saw profit booking and came
down to $384.50. Now, as our short term outlook goes, it could retrace to 76.4% where
it meets our technical long term target of $510.
In this chart, we have shown copper retracement from peak of $427 to lows of $125.35.
Copper has retraced 100% of this decline and is seeing minor correction / profit booking
and may come down to test its lower support line at $365 - $370 which is also our short
term target and from here next retracement of copper is at 138.2% which coincides to
our technical target of $510 - $520.
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AN INSIGHT INTO COPPER

Factors Affecting Copper price

Supply & Demand of Copper

The Effect of Rising Copper Prices

Factors affecting copper prices

 The world’s Demand of and Supply of copper

Copper Supply Constraints

The China and India effect

The pace of depletion in copper inventories at London Metal Exchange monitored

Estimated Copper Consumption versus

Domestic Production – China

 The volatility of Commodity Prices

The Effects of Rising Copper Prices

World Resources: A recent assessment of U.S. copper resources indicated 550

Substitutes: Aluminum substitutes for copper in power cables, electrical equipment,

Fibonacci retracement levels

Composite Indicators Signal Strength Direction

TrendSpotter Sell Maximum Weakening

Short Term Indicators

7 Day Average Directional Indicator Sell Average Weakening

10 - 8 Day Moving Average Hilo Channel Sell Weak Weakening

20 Day Moving Average vs Price Sell Strong Weakening

20 - 50 Day MACD Oscillator Sell Weak Strongest

20 Day Bollinger Bands Hold - Rising

Short Term Indicators Average: 80% Sell

Medium Term Indicators

40 Day Commodity Channel Index Sell Average Weakening

50 Day Moving Average vs Price Sell Strong Strengthening

20 - 100 Day MACD Oscillator Sell Weak Strongest

50 Day Parabolic Time/Price Sell Average Weakest

Medium Term Indicators Average: 100% Sell

60 Day Commodity Channel Index Sell Strong Weakening

100 Day Moving Average vs Price Sell Average Strengthening

50 - 100 Day MACD Oscillator Sell Weak Strongest

Support/Resistance Levels Price Key Turning Points

7.3365 Price Crosses 18-40 Day Moving Average

6.6 Price Crosses 9-40 Day Moving Average

6.195 Price Crosses 9-18 Day Moving Average

14 Day RSI at 80% 5.6698

14 Day RSI at 70% 4.8351

13 Week High 4.623

4 Week High 4.398

4.3476 38.2% Retracement from 13 Week High

4.336 Price Crosses 40 Day Moving Average Stalls

4.2625 50% Retracement from 13 Week High/Low

4.2531 Price Crosses 40 Day Moving Average

4.2352 14-3 Day Raw Stochastic at 80%

4.2085 38.2% Retracement from 4 Week High

4.194 Price Crosses 9 Day Moving Average Stalls

4.1936 14-3 Day Raw Stochastic at 70%

4.1825 Price Crosses 18 Day Moving Average Stalls

4.1774 38.2% Retracement from 13 Week Low

4.1673 14 Day RSI at 50%

4.1533 Price Crosses 18 Day Moving Average

4.15 50% Retracement from 4 Week High/Low

4.1102 14-3 Day Raw Stochastic at 50%

4.0915 38.2% Retracement from 4 Week Low

4.0642 3-10-16 Day MACD Moving Average Stalls

4.027 14-3 Day Raw Stochastic at 30%

4.0257 Price Crosses 9 Day Moving Average

3.9853 14-3 Day Raw Stochastic at 20%

Current Price 3.9605 Current Price

3.9396 14 Day %d Stochastic Stalls