The big remaining question about copper prices is which direction they will take in the second half of this year. Most observers are bullish, but when the big question is broken down into smaller questions, a picture emerges of what to watch for in the copper market.

The major US-listed copper kings are Freeport-McMoran Copper & Gold Inc. (NYSE: FCX), Newmont Mining Corp. (NYSE: NEM), Southern Copper Corp. (NYSE: SCCO), and Peruvian-based Compania de Minas Buenaventura SA (NYSE: BVN). Over the past twelve months, Freeport is up about 45%, about the same as the Global X Copper Miners ETF (NYSE: COPX). Since the beginning of the year, however, every single stock is down at least -10%, with Southern down around -35%.

Copper prices at about noon today are around $4.08/pound, which works out to $8,971/metric ton, far below the 12 month high over $4.60/lb or about $10,120/metric ton set in early February. The iPath DJ-UBS Copper Total Return Sub-Index ETN (NYSE: JJC) has lost more than -8% since January 1st.

Among the reasons for the drop is falling demand from China. In fact, this is usually cited as the top reason for the decline. The Chinese government’s tightening monetary policy has made it more difficult for Chinese buyers to borrow enough funds. Added to that is the government’s crackdown on using copper as collateral for short-term loans. The country’s stockpiles in bonded warehouses may have fallen as to below 300,000 metric tons, which is 50% below stockpiles just a few months earlier.

This could be good news for copper prices and copper miners, if the Chinese once again start buying. Goldman Sachs recently reiterated its forecast for London copper at $5/pound ($11,000/metric ton) by the end of the year. Goldman expects China to start buying heavily again to make up for the stock drawdowns.

The rationale for believing in a sharp increase in sales to China is that the country’s economy will continue to expand at its breakneck pace. But all indications are that the tight-money policies, and higher bank interest rates, are slowing the country’s growth. New construction, where a lot of copper is used, has slowed and so has automobile manufacturing.

Another reason to expect higher copper prices is that supply is constrained, and the producers cannot react quickly to increased demand. Copper stockpiles in London have increased by a quarter since the beginning of the year, due at least in part to a weak US economy. Some analysts think copper prices could fall as low as $7,000/metric ton over the summer before picking up again in the fall.

Whether copper prices rise again depends to a large extent on global economic growth. If global growth forecasts remain about 4% or so, the supply/demand fundamentals of the copper market could push prices higher. Expanded liquidity in the market, with the planned addition of at least three new copper ETFs, might also help because the new funds will all be backed by physical copper. The new funds could take as much as 150 tons off the market, further straining supplies.

The general consensus seems to be a full-year copper price of around $10,000/metric ton by the end of the year, with some outliers at $11,000/metric ton. Unless the global economy tanks, the forecast seems to be for a strong recovery for copper by the end of the year.

Paul Ausick

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