Copper basks in reflected glory as Dow Jones rallies

THE rally of the Dow Jones Industrial Average from its low since early March this year has had a positive impact on the base metals complex, particularly copper, which has re-established a positive correlation with the benchmark index after a tumultuous 2008 and a period of uncertainty in the first two months of the current calendar year.  From March to date, copper has shown a 93.1% correlation with the Dow, prompting analysts to speculate that any rise in the benchmark equity index from current levels could result in a concomitant increase in the price of the industrial metal. However, they are quick to point out that the current rally in copper, is more sentiment rather than fundamentally-driven .  While the Dow has given a 39% return since hitting a low of 6547.1 on March 9 to Mondays close of 9108.5, the return on copper has been around 55% at $5,600 per tonne level over the same period. A good showing by US corporates in the second-quarter and positive US housing data have given a boost to the Dow, the rally of which is driving up demand-centric commodities such as copper.  However, the cautionary note struck by commodity analysts may well be in order. For one, copper stock levels on the LME were at a monthly high of 278,925 tonnes on Tuesday at the time of going to press, after bottoming out at 256,900 tonnes on July 13. From July 13, even as stock levels moved up by 8% to 277,425 tonnes on July 27, the three-month copper contract on LME rose from $4,895 a tonne to $5,600, an upside of 14% over the same period. Analysts nonetheless are upbeat on the near term prospects of copper. Given the current scenario, if we are expecting another 15% rally from the current levels in equity markets, and, if our correlation theory is correct, we could expect a similar rally in copper prices as well, said Gnansekar Thiagarajan , director of Commtrendz, a Mumbai-based commodity and forex research outfit.  While declining to put a finger on the price, Arun Chokhani, a senior executive from a prominent Birla group company, says that copper could witness upside over the next month or month and a half. The correlation with the Dow is likely to take prices of copper up further. So, users and paper traders would do well to cover themselves (buy today rather than later) over the next three to four weeks.