copper price

Copper has been on a bit of a roll this month. After a quiet summer, investors have been looking at growing concentrate imports in China and increased refining to pure copper as signs that Chinese demand is picking up.

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A recent article by Reuters throws some light on what is going on behind the scenes that suggests while demand from refiners is robust, it does not mean demand from China’s consumers is equally as strong and rising imports should not necessarily be seen as a bullish sign for copper.

Copper Price

Source: Kitco.com

The metal had hit a four-week high last week, approaching $4,800 per metric ton after better-than-expected Chinese data lifted sentiment. Read more

Copper prices have been on the decline this summer, depressed by reports of oversupply and, worse, an exodus of inventory from top consumer China.

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Indeed, we recently wrote about the rise of metal coming out of Shanghai bonded warehouses ending up in London Metal Exchange stocks around Southeast Asia, leading to a 60% increase in LME stocks last month.

Why Are Exports Slowing?

We speculated this was probably a result of slowing domestic demand and unwinding of financing deals. But a recent Reuters article reports that exports have slowed and imports of refined copper have picked up in China after the price plunged to 12-month lows last month.

Reuters suggests this is due to price declines taking copper into territory where investors once again feel it is oversold and, on the back of a pick-up in demand after the summer, ripe for restocking.

Source Reuters

Source: Reuters

The article states a flood of new supply will still prove too much for the copper price and 2017 will see prices remain under pressure. Read more

There are conflicting messages out there.

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Last month, Business Insider ran a piece saying “Recent movements in copper inventories highlight the lack of significant demand for the metal, particularly in the ever-important Chinese market.”

Shanghai Futures Exchange inventories are falling while, London Metal Exchange inventories are rising, suggesting metal is flowing out of Shanghai bonded warehouses into local Asian LME sheds. The contango has grown, allowing traders to store and hedge metal on the LME supporting the move but the fact that refined metal is flowing out China suggests industrial demand is weak. BMI calls the move a red flag and says it expects imports of refined metal to fall in the coming months.

Copper_Chart_September-2016_FNL

Copper supply in LME sheds might be up, but our copper MMI is down.

Yet, just last week, better-than-expected official industrial PMI numbers unexpectedly rose to the highest level since 2014, according to Bloomberg, resulting in a bounce in copper prices, share prices in Hong Kong  and London and a fall in bond prices.

What’s Up With Copper?

So, what does this mean for copper? Was the export surge a temporary phenomenon prompted by the market moving into contango? Or is this truly a sign of an underlying weakness in demand?

China imported a record amount of refined copper in the second half of 2015, partly fueled by a relaxation of credit controls and encouraged by Beijing’s stimulus plans. Domestic refined production also increased significantly, but refiners are now cutting back and appear well supplied with concentrate in what remains an oversupplied market. Read more

The facade of the Federal Reserve Bank.

The facade of the Federal Reserve Bank.

Copper prices dipped this week with a stronger U.S. dollar hindering foreign demand for the metal.

According to a report from Nasdaq, copper for December delivery fell 0.2% at $2.0960 a pound on the Comex division of the New York Mercantile Exchange, after trading higher earlier.

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Debate on whether or not the Federal Reserve will raise interest rates this year, as well as fluctuating signs on China’s economic strength have influenced copper prices of late, keeping the metal trading in a narrow range.

“(It’s) a go-nowhere-fast-market,” Bill O’Neill, CEO, noted investor, told the news source. “But every time it appears set to break one way or another, it doesn’t happen.”

China, the world’s largest copper consumer, is looking at an improved outlook with annual growth in industrial output growing to 6.3% in August compared to a flat 6% in July, according to the National Bureau of Statistics.

As for interest rates, the Fed is scheduled to meet next week.

“‘Jittery’ does not even begin to describe the current market,” wrote analysts at Marex Spectron. “Expect traders to continue to trade on a three-hour time horizon awaiting the next headline about what the Fed may or may not do with rates in September.”

Copper MMI Drops in September

Our own Raul de Frutos recently wrote that copper’s dive in September is of no surprise:

“Any price rally could continue to be limited this year, especially if Chinese demand does not pick up and we see the supply increase that some banks are forecasting. On the other hand, an improving sentiment in the metal complex this year should support and keep copper prices from experiencing significant declines.”

How will copper and base metals fare for the remainder of 2016 and into 2017? You can find a more in-depth copper price forecast and outlook in our brand new Monthly Metal Buying Outlook report. For a short- and long-term buying strategy with specific price thresholds:

Our Copper MMI fell 5% during the month of August. The price drop is no surprise. Copper has struggled near $5,000 per metric ton multiple times this year and as we pointed out last month, buyers could expect prices to retrace in August.

Copper_Chart_September-2016_FNL

Weaker Chinese imports over the past few months and the bearish calls of some major banks have contributed to the recent price fall. Unlike other base metals, sentiment about copper is still sort of bearish, making this metal the worst performer among its peers this year. In our monthly outlook, we haven’t recommended buying copper forward yet.

Chinese Imports Lose Momentum

China isn’t self-sufficient when it comes to its copper needs and is the largest importer of the red metal. Rising Chinese imports signals increasing demand for the metal. In metals such as zinc and nickel, we’ve witnessed a surge in Chinese imports this year, adding fuel to the bull (market).

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In Q1, China’s copper imports were running at record levels but over the past few months imports are coming down. In August, China imported 350,000 mt of unwrought copper and copper products. This is the fifth consecutive month that imports have declined on a monthly bases and the lowest figure in a year.

The Non-Ferrous Laggard

Unlike zinc and nickel, remember we pointed out earlier this year that the increase in Chinese copper imports in Q1 wasn’t exactly backed by end user demand. Some of the Chinese refined copper imports found their way into the Shanghai Futures Exchange system, with inventories rising to record levels.

Now, as Chinese refined imports start to taper down, we are witnessing inventory buildup in the London Metal Exchange‘s warehouse system, with copper stocks in the LME rising to a one-year high. Combining LME, SHFE and Chinese bonded stocks, most would agree that global copper inventories have risen this year, keeping a lid on prices.

Supply Runs High

Copper is among the metals wherein top consumer China actually gains if prices stay lower, unlike aluminum or steel. The country is the largest copper importer. Therefore, lower copper prices bode well for China. This also helps explain why Chinese copper imports rose earlier this year. When prices are low it makes sense for China to import more copper instead of producing more domestically.

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Another factor weighing down on investors’ sentiment is the recent bearish calls by investment banks such as Goldman Sachs. The bank notes that the majority of the major global copper producers have already increased output by 5% during the first half, and it estimates that those same producers will ramp up supply by 15% over the next year.

What This Means For Metal Buyers

Any price rally could continue to be limited this year, especially if Chinese demand does not pick up and we see the supply increase that some banks are forecasting. On the other hand, an improving sentiment in the metal complex this year should support and keep copper prices from experiencing significant declines.

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Reuters’ Andy Home recently examined the correlation between Chinese copper exports and London Metal Exchange warehouse arrivals.

reuters_copper_imports_chart_of_the_week_083116_550

Source: Reuters, China Customs and the LME.

This week, most exchange-traded metal prices came down to Earth as the Federal Reserve hinted it may finally increase interest rates. The hardest hit was copper, which hit a two-month London Metal Exchange low. Weaker Chinese imports over the past few months and the bearish calls of some major banks have exacerbated copper’s recent price fall.

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When construction is strong in, China copper imports surge… but with them falling? It doesn’t look like demand in the world’s largest consumer is keeping up. Copper is just one of many metals that would be affected by interest rate increases and more hawkish behavior from the Fed, in general, but unlike other non-ferrous metals whose prices have increased on the LME this year — such as zinc and tin — copper has not shown strong demand and generally falling supply. Copper never was fundamentally strong even when its price jumped in Q2.

Trump Trumpets Trade

Politics met metals this week as Republican Presidential Nominee Donald Trump became the first candidate for President to promise to label China a currency manipulator and take action at the World Trade Organization accordingly.  He also promised to instruct the office of the U.S. Trade Representative to bring more trade cases against China. You’d think he’d be nicer to the country that used to make his ties.

Let’s Exchange, No Spoofs!

The London Metal Exchange and CME Group made headlines this week as the former cut fees in half this month as an apology for moving its live “ring” (where traders make deals using hand gestures on big red couches) trading to a backup location after structural problems were discovered at its brand new London office. As for CME Group, it cracked down on a rogue trader, suspending him for at least 60 days, for “spoofing.” Spoofing is the practice of setting up electronic trades to create demand only to pull out of them at the last minute.

India Hates Steel Dumping, Too

India joined the U.S. and E.U. this week in placing tariffs on cheap imports of hot-rolled and cold-rolled flat steel. Although six countries saw their imports to the world’s largest democracy tariffed, China was, again, the main dumping culprit.

Aluminum Association: Let’s Make a Deal

Speaking of China, not only does the Aluminum Association — North America’s largest trade association of primary smelters — still want a bilateral trade deal with China to set up rules for imports from the People’s Republic, but it signaled this week that it would pursue tariffs similar to those steel has won against Chinese importers if it can’t get the deal it wants for its producer members.

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The AA may even ask the International Trade Commission to reclassify some imports of “semi-finished” product to make them subject to existing taxes.

Copper prices rose in July on expectations that policymakers’ efforts to spur economic growth will increase demand for the metal.

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Expectation of a new round of infrastructure spending in China is giving investors reasons to bet on the metal.

China’s Imports Are Up

In June, China imported 420,000 metric tons of unwrought copper and copper products, up 20.3% from June of last year. For the first half of the year imports increased 21% compared to the same period in 2015. The growth in imports has helped support metal prices, too. However, there are different opinions on whether those imports are actual demand or just stockpiling into warehouses.

Prices Test $5,000/mt

3M LME copper struggles near $5,000

Three-month LME copper struggles near $5,000/mt. Source: FastMarkets.com.

So the whole metal complex is performing well, investors are optimistic that they’ll see more stimulus coming from China and copper imports are strong. This all sounds bullish for copper prices this month but copper only recently passed that 5,000-$5,100/mt level that it has failed to overcome several times this year.

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If sentiment in copper is actually shifting to bullish, we should see that reflected in the price soon, with prices climbing into new ground as we’ve witnessed in other base metals this year. We’ll have to wait and see if the bulls have found enough reasons to overcome the bears at the level prices are approaching this month.

A stronger dollar in May caused most base metals to weaken. However, in June, the dollar has pulled back, as expectations for rate increases recede.

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That helped to lift most base metals, so far, this month. But that wasn’t the case for copper, which continues to struggle on the upside.

3M Copper falls in June. Source: Fastmarkets.com

Three-month LME copper falls in June. Source: Fastmarkets.com

The red metal has held its value well this year, but it has found strong resistance near $7,500 per metric ton. Unlike other metals like zinc and steels for which we recommended buying forward earlier this year, we’ve kept recommending buying only small quantities of copper for quite some time now.

Rising Inventory Levels

60 Day LME Copper Warehouse stocks levels. Source: Kitcometals

    60-Day LME copper warehouse stocks levels. Source: kitcometals

Due to a surge in inventories at London Metal Exchange warehouses, the weaker dollar in June failed to provide a lift to prices. Copper warehouse levels in the LME system rose by almost 40% on the month to date after experiencing the highest two-day inventory surge since 2004.

Chinese Imports

China’s copper imports jumped 19.4% in May from the same period last year. Imports are running strong over the first five months, up 22% compared to the same period last year, after a weaker dollar boosted Chinese purchasing power.

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The increase in refined copper imports could be taken as bullish. However, reading the fine print, imports of copper concentrate for use by smelters jumped 45% from a year ago. The surge in concentrate imports suggests that China’s copper refined imports could ease further in June as rising  domestic smelting production will increase domestic supply and reduce import demand. That could keep a lid on prices for some time.

The monthly Copper MMI® registered a value of 66 in September, a decrease of 1.5% from 67 in August.

Copper_Chart_September-2015_FNLThe red metal has done nothing but fall since its peak in 2011. A series of lower highs and lower lows put this metal in what we call a textbook bear market.

Copper downtrend since 2011

Copper’s downtrend since 2011. Source: MetalMiner.

The declines, however, were steeper this year. Investors particularly dislike copper, as worries about China’s economy are rising.

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China’s stock market crash and the devaluation of its currency are just aggravating copper’s bear market.

Weak demand in the face of a glut of metal keeps driving prices down. China is producing more copper and importing less, weighing on an already oversupplied market. China’s copper imports fell more than 10% this year to date, while its copper production rose 9%.

Manufacturing Demand Plummets

On top of that, China’s manufacturing PMI fell to a more than 6-year low of 47.1 in August. Construction and manufacturing numbers keep giving investors reasons to remain bearish.

With prices at these low levels, according to external sources, 17% of copper mines are producing at a loss. While many producers are aggressively doing all they can to move down the cost curve, others are also cutting production. Glencore PLC recently revealed plans to suspend production at two African mines. That will cut its copper output by nearly a fifth. These facilities will not operate for 18 months while the company builds lower production cost facilities to fight the current low prices.

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Many are arguing that we are close to the bottom of the cycle with copper. However, it could be some time before the demand picture changes or enough capacity is closed to impact prices. As copper has taught us over the past few years, better to wait for the facts than be too early calling for bottom.

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