Longer-Dated Futures Prices generally get more expensive because of carrying costs, but that isn't the case for some copper contracts at the moment. The pricing situation suggests investors aren't convinced about the staying power of the economic recovery, even as they buy up the metal nearer term.

At issue is whether recent bullish economic data point toward a temporary, government-stimulus-generated recovery, or to a sustainable demand-generated recovery, says Michael Gross, broker and futures analyst with OptionSellers.com, the Website of brokerage Liberty Trading Group. "There's still a lot of investor fear," Gross says.

On Friday, October copper on Nymex's Comex settled at $2.6715 a pound. Prices increased through the June 2010 settlement of $2.70. This curve is said to be in "contango" as prices rise as delivery dates get longer. But after that, prices decline to a $2.6785 settlement for August 2011. When longer-term prices decline relative to near-term ones, it is called "backwardation."

Late Friday on the London Metal Exchange, the copper market benchmark, cash copper cost $5,871.75 a metric ton while three-month futures were at $5,897.25. Prices fall to $5,866 for 15-month copper and $5,814 for 27-month copper.

The backwardation indicates tight supplies near-term, says Michael Widmer, metals strategist with Banc of America Securities-Merrill Lynch. Last year, copper demand and prices declined drastically along with the rest of the world's economy. As surplus metal was stored, forward curves moved into contango. "More recently, the fiscal stimulus packages have arrested the deterioration of metal fundamentals," Widmer says. Now that metal-intensive industries like manufacturing are expanding in China and improving elsewhere, backwardation results.

Widmer says strengthening global metal demand could steepen the backwardation next year, but he remains concerned about the medium-term outlook: "The global economy could slow again once the fiscal stimulus runs out, as private-sector demand may not be able to pick up the slack created."

The market consensus is that Chinese stockpiling is over, says Thomas B. Winmill, portfolio manager of the Midas Fund. And there are concerns that copper bought around last year's lows is returning to the market and will pressure prices in the longer term..

Quelle: dowjones.com

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