Copper price volatility seen high in 2008/09 - CPM

FORT LAUDERDALE, Fla., May 10 (Reuters) - The price outlook for copper in 2008/09 will remain volatile, as a myriad of macro- and microeconomic trends create a "tug of war" within the investment community, an industry analyst said at the American Copper Council's 2008 Copper College.

Heading a panel discussion called "Copper: A Turbulent Ride with More to Come," Catherine Virga, senior base metals analyst with New York-based CPM Group, said she believed those trends would keep the volatility high for the next couple of years.

Declining global economic growth was one negative macroeconomic influence governing future price direction, Virga told the gathering in Fort Lauderdale, Florida.

"We do see weaker import demand from the advanced economies weighing on the growth of the developing economies," she said.

According to the International Monetary Fund, world gross domestic product growth in 2008 is forecast to ease to 3.7 percent from 4.9 percent in 2007. But Virga said she thought changes in industrial production would be an even stronger factor weighing on the red metal's price potential.

"Industrial production is expected to have the same fate as GDP. This is definitely one of the stronger negative influences I see affecting copper prices in 2008/2009," she said.

Conversely, historically low inventory levels, supply shocks, a weaker U.S. dollar, and stronger investment fund money flows have all combined to create a bullish market.

Since 2006, the market has been buffeted by strikes in Peru, Mexico, and most recently, top supplier Chile.

Those shocks to the market's supply chain have been exacerbated by dwindling levels of stocks at warehouses monitored by the exchanges.

For the year, total exchange stocks (London, Shanghai, COMEX) are down nearly 30 percent, largely due to a 44 percent decline in LME inventories.

Meanwhile, the correlation between the U.S. dollar and commodities has strengthened as the pace of the dollar's decline has accelerated.

Since the second half of 2007, the value of the dollar has fallen at a rate double that of all of 2006.

"For investors to keep selling the dollar and pushing it lower, they have to be increasingly positive about the economic prospects and financial return in countries of other liquid currencies," Virga said.

Copper has also benefited from a huge influx of investment money into the broader commodity arena as money managers seek to rebalance their portfolios for higher returns.

In the first quarter of 2008, institutional investors placed about $25 billion into commodities versus $44 billion in all of 2007.

"These trends have created a tug of war in copper prices. I think the volatility is going to continue to plague the copper market for some time," Virga said. (Reporting by Chris Kelly; Editing by Eric Walsh)