The monthly Copper MMI® ticked up to 73 in March – after its fall off a tall building down to 70 in February, copper’s dead cat bounces impressively 4.3% from its big drop.
While it’s one of only two indexes up this month, you shouldn’t read too much into this bounce:
On the London Metal Exchange, itself, copper rose 7% in the month of February. This move shouldn’t come as a surprise, either. Copper fell 25% since July 2015 and it needs some time to digest its super-sized feast of loss. Remember, prices don’t move in a straight line, they move in a zig-zag.
Therefore, this move should be taken as a normal reaction within a falling trend – simply a temporary recovery from a prolonged decline or bear market, followed by the continuation of the downtrend. There is absolutely nothing to suggest that copper has eight more lives after this dead cat bounces.
Fundamentals don’t disagree with the price action. The market is in surplus and it does not look like it will change anytime soon. The International Copper Study Group, whose members are copper-producing and consuming countries, says demand will rise just 1.1% this year while output jumps 4.3%.
As we pointed out recently, China’s production is expected to rise despite lower prices. Some production projects are already well underway and it wouldn’t be economical to suspend them at this point. Furthermore, some of these Chinese producers are government-controlled and might not be free to cut output, even if they wanted to, as prices decline.
The Blurry Production Picture
Citibank’s research department said this month that the current bearish sentiment toward copper is being heavily driven by concerns that China’s economy is slowing down and its demand for copper for manufacturing and construction is slowing down. The MMI’s slide is a reflection of this.
Reuters reported that the number of open forward copper contracts on the LME surged to record levels ahead of the Chinese Lunar New Year, with most investors betting that dwindling supplies will push prices up, despite the prospect of slower Chinese demand. Usually positions and activity would fall in what is typically a quiet time on the market with Chinese buyers away celebrating the weeklong holiday, but this year open interest topped out at 343,676 contracts on Feb. 13, equivalent to 8.6 million metric tons, although that has scaled back to around 335,000 lots as positions were closed before the start of the lunar holidays.
My colleague, Stuart Burns, wrote that thanks to the underlying uncertainty of what this means, a New York hedge fund told Reuters, “On a micro basis, I think copper is actually about to shift into a refined deficit for 2015 … But unfortunately that doesn’t matter in the short run when the macro is deteriorating and exchange stocks are rising.”
Exact Metal Price Movements: Copper MMI®
For these reasons, we wouldn’t suggest anyone take long-term positions in copper at this point. Trying to save a few dollars while copper prices are falling is a dangerous strategy, especially while commodities keep falling. Buying on strength and not on weakness seems like the only way to make sure you don’t get caught with inventory while prices keep falling.
The cash price of primary Japanese copper rose 9.0% to $6,083 per metric ton after falling the previous month. After dropping the previous month, the 3-month price of copper prices rose 7.0% on the LME to $5,840 per metric ton. The primary copper cash price rose 6.9% on the LME to $5,880 per metric ton after falling the previous month. After dropping the previous month, the cash price of Chinese copper prices rose 6.2% to $7,027 per metric ton. It was a strong month for Chinese copper wire. The metal posted a 6.1% increase, finishing at $6,856 per metric ton. The price of US copper producer grade 110 rose 5.9% to $3.43 per pound after falling the previous month. After dropping the previous month, the price of US copper producer grade 102 prices rose 5.5% to $3.62 per pound.
Korean copper strip prices fell 8.3% to $7.90 per kilogram. Chinese bright copper scrap prices decreased by 0.6% this month, ending at $5,337 per metric ton.
The Copper MMI® collects and weights 12 global copper metal price points to provide a unique view into copper price trends over a 30-day period. For more information on the Copper MMI®, how it’s calculated or how your company can use the index, please drop us a note at: info (at) agmetalminer (dot) com.