Copper jumped to a record after China’s inflation reached a two-year high, prompting investors to buy commodities as a hedge against rising consumer prices. Three-month futures on the London Metal Exchange advanced as much as 2.1 percent to $8,945 a metric ton, surpassing the previous peak of $8,940, set in July 2008. The contract, which more than doubled last year, has advanced 21 percent in 2010 on speculation that global supply will lag behind demand, and on prospects for a weaker dollar. “The inflation number should be bearish as it signals the government will keep on trying to cool the economy,” said Zhang Xi, an analyst at Luzheng Futures Co. “However, the market is taking it as a bullish factor for higher commodity prices going forward as investors seek to hedge against rising costs,” China’s inflation accelerated to 4.4 percent in October, the fastest pace in two years, signaling the government’s previous efforts to stem the risk of asset bubbles isn’t working. The People’s Bank of China announced yesterday a 0.5 percentage point increase in the amount lenders must set aside in reserve. “One of the biggest risks to the market is the Chinese government continuing to try to slow economic growth and keep inflation in check,” Zhao Na, an analyst at Yunchen Futures Co., a unit of Yunnan Copper Group Co. “The curbs so far haven’t been effective.” Market Balances Refined-copper output will lag behind demand by 435,000 tons next year, the first shortage since 2007, according to the International Copper Study Group. Copper will extend a bull run as “mammoth demand” from China, the largest user, and supply constraints combine to drive the market into a deficit from next year until 2014, Standard Chartered Plc said on Nov. 4. Futures in New York gained as much as 2.6 percent to $4.071 a pound, before trading at $4.062 a pound. The record for a most-active contract was $4.2605 a pound in May 2008. The metal in Shanghai climbed to 69,990 yuan ($10,565) a ton, the highest price since March 2008. “Even relatively conservative demand forecasts suggest that the global copper market will sustain deficits large enough to mostly deplete exchange inventories over the next five quarters,” Goldman Sachs Group Inc. analysts including Jeffrey Currie wrote in an Oct. 5 report. The rundown in stockpiles may cause “periods of extreme volatility and price spikes.” Falling Stockpiles Copper stockpiles in London Metal Exchange warehouses have shrunk 28 percent this year and are heading for their first annual decline in six years. Inventories stood at 363,950 tons yesterday, the lowest level since October 2009. The metal will trade at $11,000 a ton in a year, up 37 percent from a previous forecast, Goldman estimated in the October report. Jeremy Gray, Standard Chartered’s global head of equity research for resources, forecast in an August report that copper may rise to $12,000 a ton in the next two years. “There is a fundamental aspect to this rally in addition to what’s happening to the U.S. dollar,” said Peter Richardson, chief metals economist at Morgan Stanley Australia Ltd. Underinvestment in mine capacity over the past decade and a “significant problem” of declining ore quality will keep copper supplies tight for longer than any of the other metals, he said earlier this week. Copper, used in power cables and household appliances, has also soared on speculation that the Federal Reserve’s extended program of quantitative easing will hurt the dollar, boosting demand for commodities as alternative investments. The Dollar Index, which declined 0.2 percent today, has dropped 12 percent from its 2010 peak on June 7. World Demand World refined-copper consumption this year will probably rise 3.8 percent to 18.9 million tons, about 1 million tons more than estimated in June, because demand growth in China and Europe was stronger than anticipated, the International Copper Study Group said on Oct. 1. Demand is expected to increase 4.5 percent to 19.7 million tons next year, the ICSG said. China’s gross domestic product grew 9.6 percent in the third quarter, the smallest gain in a year, as the government moved to rein in credit growth, clamp down on speculation in the housing market and chase goals to cut energy use and pollution. “This remains an impressive rate,” Moody’s analysts including Carol Cowan wrote in a report dated Nov. 4. “China clearly remains a key influence on the prospects for the base metals industry and has led its recovery.” World Supply Copper is the second metal on the LME after tin to set a record this year as the global economy recovered from its worst recession since World War II. Tin reached a record $27,500 a ton on Nov. 9 as production was disrupted in Indonesia, the biggest exporter, and the Democratic Republic of Congo. About 3.5 million tons of new mine supply from 2010 to 2013 was delayed by the global financial crisis, accelerated by the collapse of Lehman Brothers Holdings Inc. in 2008, according to Standard Chartered. “Global copper supply will grow by only 0.9 percent in 2011 and we believe the price could spike to $12,000 a ton,” Standard Chartered’s Gray wrote in the August report. Gray analyzed more than 236 proposed copper projects and found that 81 are likely to come onstream in the next eight years. Lower ore grades and insufficient supplies of concentrate are constraining output, according to Royal Bank of Scotland. Potential labor disputes, which helped copper reach its previous record in July 2008, are also supportive of prices, RBS analysts led by Nick Moore said in an Oct. 8 report. CRU International Ltd. had estimated that about 2.5 million tons of annual production is subject to labor contract renewal in 2011. To contact the reporter for this story: Glenys Sim in Singapore at gsim4@bloomberg.net To contact the editor responsible for this story: James Poole at jpoole4@bloomberg.net

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