Copper Finishes 2013 On A Strong Note As Inventories Keep Falling

Copper was one of the best performing commodities in December as it reacted to rising growth prospects in the US and sustained growth prospects in China, the world's two largest consumers. Supporting the move has been the continued drop in inventories at warehouses monitored by the two major futures exchanges in London and Shanghai.

Copper inventories on the London Metal Exchange and the Shanghai futures exchange both fell to the lowest since January according to the most recent data from December 31. With the focus on copper in recent months having been mostly centred around the prospect for increased availability of supply, the continued pick up in demand as evidenced through the drop in inventory levels has forced traders to switch their focus.

This helped copper rise to the top of the performance table in December, not least helped by an initial round of short covering after hedge funds had built a major net-short position during October and November. During December, hedge funds have gone from being net short of 19,316 contract of futures on options on HG Copper traded in New York to being net long of 29,489 contracts, the equivalent of 334,400 metric tons.

Continued demand from US and China will be required in order to support the current rally which so far has seen the price recover 50 percent of the February to June sell-off. The month of January has provided a positive return for copper in each of the past three years at an average of 4.6 percent. With raised growth expectations one of the key drivers as 2014 begins, a fourth annual January gain in a row seems likely. However, supply is rising, which should leave the upside fairly limited. But never underestimate what momentum can do to the price and currently, momentum is supporting those holding a bullish view.