Are Copper Bull Market Days Gone?

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Copper prices took a hit in May because of a surge in LME inventories. Or… was it because of that?

I’ve pointed out this before, but people continue to talk about copper stocks to explain price movements. LME inventories rose in May by 64,000 tons, or 25%, at the same time that prices fell. But that’s simply a coincidence.

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Most of the time, inventory inflows and outflows can simply happen because traders move metal from one destination to another to profit from price arbitrages. Indeed, in November copper prices climbed 20% while LME stocks rose by more than 90,000 tons. I would argue that inventory levels have no predictability on price trends. But then what drove copper prices down?

China to Halt Credit Growth

China is putting efforts on halting risky lending and rising borrowing costs in order to limit credit growth. Interest rates in China have risen to the highest level in two years while the country’s tough talks on curbing credit are expected to put the brakes on credit growth.

As I wrote last week, “the noticeable tightening in Chinese monetary policy is bad news for property markets in China. The country has also pledged to halt risky local funding on the construction of infrastructure projects. Investors know that this will hurt demand for commodities and industrial metals.”

As a result, we are witnessing significant price weakness across commodity markets. This weakness is already spreading out to industrial metals such as nickel, which fell to a 10-month low this month. Investors have been lured by China’s pledges of supply cuts to combat pollution, but those cuts might not help much if the demand side of the equation starts to disappoint. Remember that China is responsible for some 45% of global copper consumption.

Copper Miners Hit a 6-month Low

Copper Miners ETF. Source: MetalMiner analysis of data

I like to see how the stocks of copper mining companies perform to get a gauge on copper prices. Sometimes, they give early signals that sentiment toward copper is shifting. Last week, shares of copper miners fell to a six-month low. Trading volume was heavy on the declines, suggesting that copper investors have started to unwind positions.

What This Means For Metal Buyers

Copper prices have been range-bound this year. But as supply concerns have eased, prices could break down if worries over a slowdown in Chinese demand continue to mount.

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