Copper – Which Way Next?

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Copper does not seem to know which way to turn.

The price fell on Wednesday just as it seemed to have hit a steady trend. The FT reported Chinese buyers have been back in the market of late, buying on dips in a manner not seen this year. Since the start of the year, they have been keeping largely out of the market for primary refined copper, preferring to draw down bonded domestic stocks. Glencore is quoted as saying stocks have at least halved since the beginning of the year while premiums for physical delivery at nearby LME locations in South Korea and Singapore have risen in recent weeks, suggesting local Asian demand is rising.

Source: kitco.com

As the above graph shows, copper prices fell to an 8-month low of $8,446 a ton in early August, but since then, prices have risen more than 9 percent to $9,225 on Tuesday, before falling again on Wednesday on weak US data and wider fears of a global slowdown.

China’s Role Overblown?

China accounts for 38 percent of global copper demand, so when Chinese buyers come into the market in force, they have a significant actual and psychological impact. But hopes that China alone will drive prices back up to previous levels if the West slips into recession are misplaced. China does not have the latitude massive fiscal stimulus like it did in 2009; Beijing is fighting inflation and that will remain their No. 1 priority. China’s impact on the rest of the world is in reality more negative than positive, running a massive current account surplus (the IMF’s projection for China’s current account surplus is for a rise from 5.7 percent of gross domestic product in 2011 to 7.8 percent of GDP in 2016), which acts as a drag on global growth. It is deficit countries that create a spur for production and employment elsewhere.

Nevertheless, Chinese buying on dips may mark a new floor in the copper price, albeit one that will display a fair amount of volatility. The strengthening renminbi is making dollar-denominated LME prices gradually cheaper for Chinese buyers and domestic demand has remained robust, much more robust than the absence of Chinese buyers suggested in the first half of the year.

Fundamentals Vs. Speculation

Arguments are made as to how much commodity price movements are driven by fundamentals and to what extent by speculators, but the reality is speculators are probably driven as much by their interpretation of the fundamentals and herd instinct as anything else.

The supply side fundamentals are looking relatively sound for copper. Chile, which provides around a third of the world’s copper, produced only 373,498 tons of copper in July, down 18 percent from the same month last year — and there is a threat of a strike at the world’s third-largest mine, Indonesia’s Grasberg, according to a Reuters article. Chinese demand is proving solid; the main variable is uncertainty around Western demand over the next 12 months. Much of that must have been factored in to current prices, hence the boost even moderate Chinese buying is giving to the price.

Do current levels present a longer-term buying opportunity for copper consumers? You have to say the Chinese have been very canny about their buying strategy over recent years — following their lead and buying forward in current dips may prove a good policy for Western buyers able to fix prices forward.

–Stuart Burns

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