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Copper Flat – Growing Supplies Offset China Rally

Copper Flat – Growing Supplies Offset China Rally

By Jim Williams

Copper opened the week flat as investors were mindful of growing global supplies. The rough start to the week happened despite a rally in China’s stock markets after positive comments from the country’s top securities regulator.

Chinese shares closed at their highest in 7-1/2 months after a China Securities Regulatory Commission spokesman said on Friday that improving economic performance, more liquidity and market reforms were sparking a rebound in equities.

“The market looked as though it was going to start out the month refreshed with fundamental vigor,” states Michael Turek, Head of the metals desk at NewEdge. “Instead, the complex is fraught with near term geopolitical anxiety which is discouraging some fresh investor engagement. Indeed it looks as though some length has actually been trimmed. That course of action might be somewhat premature for the long term as indicated by today’s resilience in price but for now we seem to have lost a little direction and confidence.”

There is widespread risk aversion in global markets due to political tensions, with the euro zone’s sentiment index slumping unexpectedly in August as EU sanctions on Russia weighed on growth expectations.

“If risk aversion remains high, it is likely to preclude any rise in prices for the time being, especially as net long positions continue to be relatively high, which means there is further potential for them to be reduced,” Commerzbank said in a note.

Part of that lack of confidence Turek mentions above, specifically the limits with copper, can be attributed to a slow down in U.S. job growth in July and the unemployment rate rising unexpectedly. Those two factors point to a slack in the labor market, giving the Federal Reserve room to keep interest rates low for the time being.

Growing Supplies, But Projected Low Imports

As we mentioned last week, Freeport-McMoRan Inc’s Indonesian unit will resume copper concentrate exports by the middle of this week after it resolved a six-month-old tax dispute with the government.

Freeport, which runs one of the world’s biggest copper mines in Papua, would make an initial shipment of 10,000 tons to China.

Mr Rozik Soetjipto CEO of Freeport Indonesia said, “It will be the first export shipment this year. Hopefully all administration matters can be finished according to the schedule.”

In Other News

Reuters is reporting that Goldman Sachs expects copper to underperform other base metal prices over the next 12 months, citing copper’s heavy exposure to China’s property sector, which it expects to remain bearish this year and next.

The bank also said that copper has entered a once in 20 year supply cycle, which started in the second half of 2012 and is set to last through to 2016 to 2017, following a decade of high capital expenditure investment in the industry, raising trend supply growth to about 4% to 5% from about 2% over the past decade.

Goldman published a note late in July lowering its 2015 average copper price forecast to USD 6,400 per ton from USD 6,600. The investment bank also cut its 2016 outlook to $6,600 per ton from $7,000 partly due to expectations of lower marginal production costs.

Chinese trade data for July will be released on Friday, and copper imports may be low again as trade houses find it difficult to get financing to store metal after suspected fraud at China’s Qingdao port earlier this year.

 High Grade Copper Chart

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