By Allen Sykora
Kitco News:Slowing economic growth in the U.S. and China could prompt a retreat in copper prices, but analysts say this may be a temporary phenomenon, with both prices and demand potentially picking up again later this year and next.

While some of the data out of China may not be as robust as earlier in 2010, it nevertheless remains decent. Meanwhile, copper is only a few months away from the time of year when demand picks up on a seasonal basis.

In fact, observers say, many forecasters are still looking for a global supply/demand deficit in 2011.Copper for December delivery fell 5.85 cents Wednesday to settle at $3.2755 per pound on the Comex division of the New York Mercantile Exchange. The metal has backed down from a three-month peak of $3.4305 hit on Aug. 4.

U.S. non-farm payrolls fell 131,000 last month. While much of this was due to the end of temporary Census Bureau jobs, a 71,000 increase in private-sector employment was less than the roughly 100,000 economists expected. The Federal Open Market Committee Tuesday conceded that economic recovery is “more modest in the near term than had been anticipated.”

On another front, China’s July industrial production registered 13.4% annual growth, the slowest pace since August 2009. The country is especially critical to the copper market as the world's largest consumer of the red metal.

Copper could slip back toward $3 a pound, particularly if some investors opt to sell to exit positions and book profits amid economic worries, said Brian Hicks, co-manager of U.S. Global Investors' Global Resources Fund (PSPFX). But if data weakens too much, central bankers are likely to undertake further measures to boost the economy again, such as more quantitative easing, he said.

Jesus Villegas, analyst with Harbor Intelligence, looks for copper to bounce again later this year, helped in part by a seasonal pick-up in demand. He said copper could fall to $3.10 under a “worst-case scenario” or near $3 in a “worst-, worst-” case scenario. However, he does not look for a massive sell-off below here, as in late 2008 when economy tanked amid a global credit crisis.

By the end of 2010, copper could rally back to $3.40 to $3.45, then hit $3.80 to $4 in 2011, Villegas continued. “I think in the first four months of next year, we will have a substantial upside risk in both demand and prices for copper,” he said.

By late summer, much of the buying for construction-related purposes has already wound down for the year. But early in a new year, there is restocking by construction and industrial buyers. Others figure any declines even due to macroeconomic conditions ultimately will be limited.

“I think, generally speaking, copper demand in China should hold fairly steady despite the last month or two of soft-ish (economic) numbers,” said Edward Meir, analyst with MF Global. Anecdotal reports are that demand from end consumers and fabricators in the country remains decent, he said. “There isn't a big slowdown,” Meir said. “Also, scrap (supply) is tight and imports are still holding.”

Prices on the Shanghai Futures Exchange recently have been above those on the London Metals Exchange, an indication that demand in China is holding up, said Patricia Mohr, vice president with Scotiabank.

Meir suggested three-months metal on the London Metal Exchange, which was around $7,180 per metric ton as he spoke, could fall as far as $6,400 yet this year but also trade as high as $7,600. He looks of a range $6,500 to $8,000 in 2011.

Global commodity strategist Bart Melek described BMO Capital Markets as still bullish on copper. Whereas economic data has been softer lately, some pause in the pace of any economic recovery can be expected. Still, Melek said, global growth is likely to be near 4% this year and 3.8% next year.

“In an environment of super easy monetary policy and possible quantitative easing in the Western world, that is a very good formula for higher commodity prices broadly and certainly for copper,” Melek said.

The analyst said BMO does not anticipate a double-dip recession, especially with the Federal Reserve cognizant of a potential slowing of growth and thus willing to offer further stimulus. And whereas China's industrial production abated from earlier in the year, BMO still anticipates a 2010 average of around 13.5%, which still means a lot of copper consumption. Actual demand is not declining, he emphasized. Instead, it's a case where the rate of the increase has simply slowed.

BMO still looks for a roughly 6.5% increase in global copper demand during 2010 and around a 7% increase next year, Melek said. “We like the demand side of the story,” he said.

Melek also said there are also supply constraints that will offer some support. For some time, analysts have cautioned that there are few major new mines coming on line, while ore grades are declining at some existing mines.

Copper should move from a supply/demand surplus toward a more balanced market by year end, Melek said. For 2011, BMO anticipates a global supply deficit of some 280,000 metric tons, with a price forecast of $3.70 a pound.

“As we move into 2011, even with modest growth in the rest of the world, we should get a tightening of the copper market,” Melek said.

Author is associated with Kitco News: asykora@kitco.com