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As China Goes, So Goes Copper

By Jim Williams

Copper prices rose in early morning trading Tuesday after the Shanghai Composite closed up 3.7 percent as Chinese regulators continue to roll out rescue measures to try and put the brakes on a 27 percent drop in stocks since mid-June.

Copper for September delivery on the Comex division of the New York Mercantile Exchange jumped 2.1 cents. That is just 0.9 percent, but it is a positive after the red metal recently hit a six-year low. Prices had plummeted to $2.3460 a pound, the lowest level since July 2009, after weak manufacturing data from China intensified concerns about demand from the world’s top copper buyer.

“Significantly rising Chinese equity markets are giving prices some tailwind again this morning, allowing them to recover somewhat from the lows,” analysts at Commerzbank said in a note to clients. But the rebound is unlikely to last given the “increasingly pessimistic” sentiment among traders in recent months, they added.

A weaker dollar, which pulled back against other currencies, also lent copper prices support. The Wall Street Journal Dollar Index was recently down 0.3 percent at 88.62. Copper is traded in dollars and becomes less expensive for investors using stronger currencies to fund their purchases.

A weaker U.S. currency makes commodities such as copper cheaper for holders of other currencies. “Funds have been pretty short for a while and dollar weakness has probably prompted some covering,” said David Wilson, analyst at Citi.

“Fundamentals are not as bad as prices suggest; Chinese buying is better. But right now everything is to do with macro sentiment and very little to do with fundamentals.”

New contributor Andrew Hecht wrote just yesterday, “Copper is now trading at the lowest level since July 2009. It closed on Friday, July 31, at around $2.35 per pound just 1.25 cents above recent lows established on July 27. Copper has been falling like a stone since May and the metal has been making lower highs and lower lows since 2011. In copper, China is driving the price lower. There is a tremendous amount of the metal held in financing deals on Chinese soil. The copper is collateral against low interest loans and as the value of the collateral falls, there are margin calls against those loans. This means that lower copper will cause liquidation of some of collateral in order to meet the margin calls. Therefore, in copper, lower prices beget even lower prices in what has become a vicious cycle for the red metal. The action in copper provides a second ominous sign for economic conditions in China and around the world.”

You can read Andrew’s entire article on Seeking Alpha “Lumber, Oil, Copper: Ominous Signs” here.

Elsewhere, some analysts point to disruptions to the operation of copper mines in Zambia and Chile as possibly putting a dent in supply. Dry weather in Papua New Guinea, strikes and flash floods in Chile, a pay dispute in Indonesia and an electrical problem in Australia prompted copper traders, who had been net-bearish on prices for nearly six months, to turn net-bullish on copper in early March.

“A lot of the problems are viewed as temporary,” said Bill O’Neill, co-founder of commodities investment company Logic Advisors. “The demand side of the market is just not enough to put any kind of upside pressure on copper,” he said.

Information in this article pulled from Reuters, Investing.com, Nasdaq.com and Seeking Alpha.

 

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