The price of copper crept over the $7,000 mark in early trading Monday only to cool by closing at $6,987 – settling at only $2 above Friday’s final tally.
You may have seen that figure associated with copper in many articles on pricing. That is because experts have drawn the line in the sand at the $7,000 level as the psychologically important benchmark for pricing the red metal. Anything above that mark is theoretically trending in the right direction. Below $7k and the sky is falling! Well, not literally, but…
In reality, copper prices have been on a roller coaster ride much of the year dropping over five per cent since the beginning of 2014. The biggest hit to the market happened a few months ago when a scandal over financing of commodities broke out in China.
Since the scam was uncovered copper shipments to China have dropped drastically. In May, copper imports declined 16 per cent to 3,80,000 tonnes from April and last month they slipped further to 3,50,000 tonnes.
The scandal has resulted in liquidity problems since banks have tightened their credit norms. This can lead to problems in the market and even lead to selling pressure – a reason for copper’s struggle.
Another key fact in the ongoing struggle for copper is the ratio of commodities to equities is at the lowest we’ve seen in over a decade. “There will be natural rebalancing from stocks to commodities when equities are perceived to be overbought and when there is a compelling story in the metals”, says Michael Turek, Head of the Metals Desk at NewEdge. “I am perhaps not qualified to comment on the former but in terms of the latter we are facing a most interesting confluence of positive influences. China is stimulating the economy (albeit papering over their credit cracks) but not admitting to it. Europe is not the basket case we thought it might be. In the States demand is robust. Available supply in all metals is more constrained than it appears to be. Consequently prices have been rising, as has engagement by the investor community.
“Far be it for me to diverge from the respected opinion of other venerable houses but perhaps the cycle has been misread largely due to the Fed’s continued intervention in the interest rate market and because of the ongoing evolution of a new regulatory environment. It might tempt some to talk markets down to buy them but we already see more buying in the dips from institutional and industrial clients alike.”
A recent report from Reuters makes Turek seem almost prophetic in his analysis. The Shanghai Futures Exchange (SHFE) copper prices decreased late last week due to investors’ concern over the declining property market around the country and overproduction of copper.
“We are increasingly worried about China’s property market. New dwelling commencements are down 18.6 percent year-on-year in the first five months, the sharpest decline since 2009,” according to Reuters.
That property market concern was heightened after a Chinese company announced a possible debt default last Wednesday. China’s Huatong Road & Bridge Group, a construction firm, said it could not repay a $65 million debt, which will be the second default in the domestic bond market.
As always, if you don’t like the price of copper, just wait a few hours and it will most likely change – just like our analogy of the weather in the Midwest in last week’s article.
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