Commodities | Nov 25 2010
By Chris Shaw
For some time Barclays Capital has suggested the fundamental backdrop for copper prices has been supportive, so the sell-off in the metal last week of US$405 per tonne or 4.6% has created a buying opportunity in the group's view.
Prices have not recovered this week and at an overnight close of US$8,290 per tonne are well below the recent record high of US$8,996 per tonne.
According to Barclays the sell-off has been an overreaction to current macroeconomic concerns related to sovereign debt issues in Europe and fears of an overheating in the Chinese economy. This poor sentiment has been a recurring feature in commodity markets this year in the view of Barclays, as macroeconomic issues have continued to hide positive underlying fundamentals.
These fundamentals for copper include a low stocks-to-consumption ratio, still robust Chinese import volumes and a broad-based recovery in economic activity levels.
Barclays has a fair value model for copper and this supports the view copper prices have been oversold, as the model shows prices have now turned to markedly undervalued levels. The current price is several hundred dollars per tonne below the fair value level implied by the model.
The model suggests fair value for copper at present is around US$8.500 per tonne, rising to above US$9,000 per tonne by the end of this year. Given this discount to fair value Barclays suggests current prices offer a buying opportunity in copper, one it expects is likely to be short-lived.
