SPECIAL REPORT IN COPPER by

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

Source: WBMS www.world-bureau.com

Region %

Asia 43

America 32

Europe 19

Africa 4

Oceania 2

Total 100

Industrial consumption

Source: Standard CIB Global Research

www.standardbank.co.za

Industry %

Electrical/Electronic 42

Construction 28

Transportation 12

Consumer/General 9

Industrial

Machinery 9

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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