Potentially weaker demand from China and the United States could hit copper prices over the next few months and offer a buying opportunity for those who believe in the metal's long term prospects.
Some fund managers think prices of the metal used widely in power and construction could fall towards $7,000 a tonne on the London Metal Exchange, a drop of more than 20 percent from the record high of $8,880 hit on April 17.
Copper for most of this year has been buoyed by a flood of investment money, a weak dollar and the idea that strong Chinese demand growth will offset weakness in the United States where the housing and construction industries are in recession.
But Chinese copper consumers have been conspicuous by their absence, partly because of high prices, and many who thought emerging markets would be immune to slowdown in the United States and the West are changing that view.
We can't view emerging markets as separate from the developed world, there is a relationship, said Nadja Reznikova, a metals analyst at Wermuth Asset Management. In the short term that will affect metals demand.
In the long term Reznikova expects copper prices to be firmly underpinned by the billions of dollars earmarked for infrastructure investment, not just in emerging countries, but also in the developed world.
However, before that investors will face a barrage of hurdles including a firmer dollar, which makes dollar-priced commodities more expensive for holders of other currencies.
If, as was indicated by U.S. Federal Reserve Chairman Ben Bernanke earlier this week, U.S. interest rates have bottomed, then further dollar losses are unlikely, fund managers say.
With the U.S. central bank putting the spotlight on inflationary risks, some are starting to think about rate rises, possibly as early as next year.
That could curb investors' enthusiasm for commodities overall, and particularly for copper as the prospect of higher rates could further damage confidence in the housing market, already under siege from the subprime debacle.
Ultimately it could mean a longer period of housing market recession in the United States, which accounts for about 15 percent of global copper consumption, estimated at around 18 million tonnes this year.
On a six month perspective, industrial metals will trade lower, said Christoph Eibl, head of trading at fund firm Tiberius Group. I cannot see China taking up what the U.S. cannot absorb.
China accounts for about 25 percent of global consumption.
Copper consumers in the country built up stocks earlier this year and are likely to stay away from the market, at least until the third quarter, analysts say.
Chinese consumers rebuilt inventory quite aggressively in February and March, said Michael Jansen, analyst at JPMorgan.
However China is still structurally short of copper and at some point over the next 6 months we should expect to see a pick up in demand.
Lack of Chinese interest in the short term can be seen in lower imports, which show a fall of 31 percent in April to 127,977 tonnes from a year earlier. Month-on-month in April the rise was 1.2 percent.
The country's exports of the metal also surged by 337 percent over the same period to 18,797 tonnes. In April exports rose 64.7 percent.
Behind these changes are producers ramping up domestic production using feedstock and concentrate to make copper metal or cathode and reduce dependency on international markets.
China's imports of copper concentrate rose by 21.1 percent to 505,194 tonnes in April from the previous month.
The country's imports of copper concentrate has been growing much faster than its imports of refined copper, said Gary Mead, senior commodities analyst at Virtual Metals.
China is beginning to be a much bigger producer of refined copper ... That's a long term interesting conundrum for the copper market. (Reporting by Pratima Desai and Humeyra Pamuk; Editing by Peter Blackburn)
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