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China Is the Key to Copper Prices

By Jim Williams

Copper edged higher to start the week, but any potential gains were capped after new home prices in China fell in July, marking the third month in a row.

The National Bureau of Statistics announced that new home prices fell in 64 out of 70 cities in China last month, the most since January 2011.

Foreign direct investment in China also fell for the first time in 17 months compared with the same period a year earlier, as firms from Japan, Europe and the United States cut spending in the manufacturing sector.

A recovery in copper prices that began in mid-March fizzled out as mines ramp up shipments and supplies swell. Hedge funds and money managers slashed their bullish bets on copper futures and options last week, the Commodity Futures Trading Commission said on Friday, as concerns resurfaced over the strength of global economic growth.

“Copper is down about 8.7% on the CME,” states Bloomberg’s Kenneth Hoffman. “A lot of people think it’s actually pretty good, because if you look at the other industrial metal that people look at, Iron ore, it is down 30%.

“Because when copper has had bad months – March and June, China’s SRB (Strategic Reserve Board) has stepped in and have bought about…$3.5 billion dollars worth of copper, and a lot of people believe that’s kept the market where it is today.

“The big question for traders in the second half is, if we continue to see to any weakness, will the Chinese government step in again and keep prices high?”

Todd Horwitz, from Averagejoeoptions.com told Bloomberg TV he thinks we may be hovering around the $3 mark for a while – “I think copper has been reeling for the last couple of years after the big explosion up to $4. It’s really been stuck between three and four dollars as a rule. It’s really showing the global economy is weaker, however, the Chinese do use it as a lending vehicle. They put up copper as collateral, which is why they want to keep the price higher, which is why when the price dips down they would come in to buy copper. So I would think you would see the Chinese step in here if the price goes any lower, you know at this $3 level they would probably be stepping in here to buy, because again, a lot of their loans are based on the price of copper and that’s what’s used to collateralize a lot of their loans. The overall economy looks very weak. We’re not getting a lot of growth in the developing countries which is would be a big use for copper.

“At the end of the day, I think China will probably try to artificially hold this price up here because of the loan value in their country. And, I think $3 is a pretty good level if you’re going to play it to get involved in copper to the long side of it and hoping it gets back up to the $4 level.”

Three-month copper on the London Metal Exchange closed up 0.5 percent at $6,905 a ton, rebounding from losses of up to 5 percent this month. The price fell by 1.8 percent last week alone, touching $6,821 on Thursday, the lowest since June 23.

Investors are still hesitant about developments in China. Prices were weighed down by news on Monday that price falls in new housing also spread to a record number of Chinese cities including Beijing, underlining a worsening property downturn that is increasingly dragging on the broader economy.

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