Having rallied January through May, Copper now looks to be following iron ore downward.
The metal has fallen more than $400 from its price at the beginning of May to below $6,000 per metric ton on the London Metal Exchange. The spot price is sub-$6,000 with the three-month delivery price marginally higher but also hovering beneath $6,000 per mt.
Chinese Power Non-Demand
According to the FT, analysts expect China’s copper demand to grow by 4% this year, yet that figure is based on considerable use in power grid investment and assumes government spending plans will be met.
Power grid investment actually fell by 8.65% in April, according to the FT, and in the first four months of this year China completed 86.6 billion CNY of grid investment, only 20% of the planned amount for the year, so there is no guarantee that demand growth prediction will materialize.
Last year, only 88.7% of grid investment was completed and this year power consumption has actually fallen as industrial activity has eased. Indeed, Goldman Sachs suggests even planned power grid investment may not provide the boost many hoped for, saying China could switch to aluminum instead of copper for power transmission. Copper is more than three times as expensive as aluminum and China has a surplus of aluminum, yet imports 75% of its copper.
Investors Doubtful, Too
Investors agree with the pessimistic outlook cutting their net long positions in copper, joining Chinese speculators who have been betting against the red metal all year.
A CNBC report says recent weakness is due to weak premiums, high scrap discounts and a failure of the seasonally strongest quarter for copper to translate into solid demand. China’s factories are now approaching a summer slow down and with it lower metal consumption.
Goldman Sachs is predicting Chinese demand will fail to materialize this year and has targeted a price of $5,200 per mt by 2016. Longer term the fundamentals for copper are said to be better than Iron Ore, supply should peak by 2017 and then fall but in the meantime consumers should benefit from weaker prices this year and next.