Is This Commodity Staging a Comeback?

Dr. Copper has been feeling a bit under the weather lately. Last week, copper (NYSE:JJC) prices hit a fresh 15-month low on the London Metal Exchange.  US dollar (NYSE:UUP) strength and China (NYSE:FXI) slowdown fears were some of the culprits in the commodity pullback.  However, since the new lows made last week, copper prices have rebounded 12%.

What caused a rebound in commodities (NYSE:RJI) like copper?  More optimism concerning Europe has strengthen the euro while weakening the dollar.  President of the European Commission José Manuel Barroso said banks in Europe should temporarily raise their capital reserves to better weather markets made turbulent by the region’s sovereign debt problems. After lawmakers rejected measures to expand the European Financial Stability Facility, Slovakia’s political parties are rushing to find a way to approve the enhanced rescue fund. Slovakia is the only remaining country in the 17-member euro zone that has not approved measures that would increase the EFSF’s effective lending capacity to 440 billion euros, give it the power to inject capital into banks, and allow it to buy the bonds of distressed governments on the open market.

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After falling four consecutive months, China’s manufacturing purchasing managers’ index rose to 51.2 in September from 50.9 in August.  It was a pleasant surprise as analysts were expecting another decline in the index.  Furthermore, China appears committed to its economy, as China’s sovereign-wealth fund stepped in Monday to purchase shares of the country’s banks after steep declines.

The rebound in copper prices have sent major copper producers, Freeport-McMoRan (NYSE:FCX) and Southern Copper (NYSE:SCCO), soaring.  Since last week, Freeport-McMoRan has jumped 24%, while Southern Copper has gained 22%.

Although copper shares have rebounded sharply, investors who bought the dip may want to consider locking in profits soon. The Financial Times reported late on Wednesday, “China has for the first time revealed the estimated size of its copper inventories, shedding light on one of the commodity market’s biggest mysteries.”  As it turns out, Chinese copper inventories came in at 1.9 million tonnes at the end of 2010.  This is nearly double previous estimates, and equals more copper than the US consumes in a year.  Considering China represents about 40% of the world’s copper demand, copper prices could see another steep pullback if China demand was artificially high due to hoarding.

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