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Johannesburg - Tread carefully when looking at the recent rally in the copper price as it may not be sustainable.
This is according to Paul Hansen a portfolio manager at asset management firm Stanlib.
"There is a lot of risk in the copper price at the moment and our guys are very wary here," said Hansen in a presentation on Wednesday.
Demand for base metals such as copper is often viewed as a leading indicator by investors who are attempting to gauge economic levels.
Copper prices fell sharply in late 2008 as the economic and financial crisis began to impact on demand for manufactured goods. JSE-listed resource giants such as Anglo American and BHP Billiton have rallied in recent weeks as investors have begun to speculate that demand was beginning to rise.
Since December the price of copper has risen from around US$2 800 a tonne to current levels of $4 590.
Anglo American slumped from a 12-month high of R557 to a low of R134.20 but has subsequently rebounded to above R200 a share as equity markets have recovered slightly and demand has returned for base metals.
Manufacturer inventory levels have declined worldwide and according to Hansen many businesses have been reluctant to restock to previous levels, which reflects in lower commodity prices.
"The stock to consumption ratio has a long way to go," said Hansen, who doesn't believe Chinese demand would be enough to sustain the rally. Hansen said: "We must remember that the Chinese only buy about 27% of world copper; where is the rest of the demand going to come from?"
Kevin Lings, an economist at Stanlib, also cautioned against expectations of a rapid economic rebound. He said that while consumer data out of the US had been positive in the first quarter of 2009, investors need to remain cautious.
Lings said: "What we are seeing now is evidence of financial market stability," but he cautioned that while producers were reducing stock on hand, they were not rushing to replenish to previous levels.
On a positive note, Lings said that global production is falling faster than consumption, however he cautioned that rising levels of unemployment would continue to weigh on business.
"Unemployment is now the biggest risk," said Lings.
- Fin24.com