By Andrea Hotter
Of DOW JONES NEWSWIRES
LONDON --All bets are off for copper as the fundamentals take a backseat to the short-positions holders in China and the investment community, leaving a significant move higher and an extraordinary rise in risk on the cards.

Benchmark prices on the London Metal Exchange are already at all-time highs above $9,000 a metric ton, having made steady gains since the start of 2009. But while demand for copper, used in housing and construction, has improved significantly since the economic downturn took its toll, producers nonetheless admit that consumption patterns are still not back to pre-October 2008 levels.

Sovereign debt worries in Europe seem to be being shrugged off, and the U.S. economy is still far from back on its feet.

Despite this, the market has beaten its July 2008 peak of $8,940/ton, then an all-time high established after several years of steady gains, and momentum for further increases is showing few signs of slowing.

While a huge speculative premium was attributed to the 2008 copper rally, what's different this time around is that China and several commodity investors seem to have got it wrong.

The problem for China is that players there delayed pricing on their recent shipments, and the copper market has since soared. Because they can delay pricing into the new budget year in February, the Chinese can continue to roll positions forward as long as they are prepared to pay the cost of the backwardation, meaning the spreads will stay tight at the very least.

Hedge funds, especially the commodity specialists, meanwhile missed the copper boat and failed to buy when prices slipped lower at various times over the last few months, primarily because they called the top of the market too soon.

This means it's only a matter of time before shorts are forced to buy or deliver, with several hedge funds--but not all--being forced to return to the market as buyers already. In the interim, positions are being rolled forward.

"Buying the dip just entered a whole new uncharted level of risk," said Alex Heath, head of base metals at RBC Capital Markets. Heath said that to buy at current levels requires a new mindset about what constitutes value, a cast iron belief in global and especially growth in China, and "deep pockets to absorb the bouts of profit-taking that is bound to occur from here on in."

The key with China is whether it will deliver against its shorts; merchants say participants there have enough material for this to happen, at least partially. But traders said all scenarios envisage further market strength, with a spike in copper prices likely once shorts start to be covered, before a correction is ultimately seen.

What could scupper things further for the Chinese is the planned launch of the exchange-traded funds for copper. The first, launched by ETFS Securities Limited with Deutsche Bank as the custodian of the metal, launched Friday, with more--by BlackRock Asset Management International Inc. and J.P. Morgan--seeking regulatory approval.

The likelihood is that the products won't all be up and running until at least April next year, by which time current market shorts may have dealt with their positions and be excused further pain.

But what's clear is that if these products take off to the same extent as gold--where ETFs now account for around a third of overall demand for the metal--they could be a game changer for copper, rewriting the rulebook and putting a new, higher floor under prices going forward.

-By Andrea Hotter, Dow Jones Newswires; +44 (0)20 7842 9413; andrea.hotter@dowjones.com

Source: http://online.wsj.com/article/BT-CO-20101209-707363.html