Copper Riding Through a Volatile Period

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A Reuters US article reported earlier this week of how the copper price fell after the release of figures showing Chinese imports of refined copper had fallen. The fear is China’s economy is cooling after imports fell nearly a third in October, fueling concerns that credit tightening is rapidly cooling demand. However, local analysts blamed falling supply as the cause rather than lack of demand even though, curiously, stocks on the SHFE rose by 21.3% during the same period, according to a Reuters London article. Certainly one month does not necessarily mark a new trend, but several months of figures might, and China’s imports have been gradually falling this year over last — some 10.5% lower compared to 2009. Even this, though, should be seen in the light of 2009’s massive re-stocking program boosting apparent demand, a large part of which went into both trade and speculative stocks. Real demand has probably grown over last year and the recent drops should be seen in the light of current high prices dissuading consumers from further buying and encouraging the draw-down and use of stock bought last year at lower prices. Incoming material has therefore found its way onto the SHFE rather than having been taken up by consumers, suggesting that while prices remain at this level, consumers may prefer to live off lower-priced stock material rather than come back into the market for new supplies. That is a temporary situation, however, and a combination of stock depletion and slightly lower prices following recent LME price falls may encourage buying towards the year end. Certainly the market gets bought after each scare creates a dip in prices.

Two issues are driving the copper market at present. The first is fear that China’s growth may slow dramatically next year. Nearly everyone expects there will be a slowdown in growth but to what extent there is much debate. The second issue is the level of the US dollar, which is getting support from the European debt crisis and from the Korean artillery exchanges causing tension in Southeast Asia. Every time there is tension over these two issues, the dollar gets stronger on the back of a risk sell-off and metal prices fall. Interestingly, on a side note, you would expect gold to get stronger on the back of the flight to safety, but it hasn’t moved anywhere near as much as may be expected.

Copper, no doubt, is supported by its fundamentals. World refined copper consumption exceeded production by 363,000 tons between January and August this year, compared with a deficit of 47,000 tons in the same period a year ago, according to a Reuters article reporting on the International Copper Study Group’s latest monthly bulletin. World refined copper output in January to August reached 12.653 million tons, while consumption amounted to 13.016 million tons. If China demand does no more than stay flat and OECD demand gradually increases, that deficit is not going to go away. Data out this week suggests Europe’s largest economy and by far the strongest manufacturer is more upbeat about growth prospects in the next six months than at any time since the IFO think tank estimates began. Growth in the US, while not strong, does now look as if it will avoid a double dip and manufacturing in particular is doing well.

The industries’ tendency to buy copper on the dips is therefore understandable; any respite from recent highs is to be welcomed particularly, as there is little prospect of significantly lower prices next year.

–Stuart Burns

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