By Jim Williams
Copper held its biggest gain (although a small one) in almost a week, based on inflation news out of China.
The red metal was little changed after climbing 0.4 percent on Monday. Inflation is slowing in China as domestic demand weakens and commodities slide. Consumer prices in China rose 0.8 percent in January from a year earlier, the slowest since November 2009. Factory gate prices fell 4.3 percent, the 35th month of declines.
“People understand that China’s going through a period of slowing growth and that there’s probably more downside,” said Gavin Wendt, founding director and senior resource analyst at Mine Life Pty Ltd. China’s inflation figures “will likely trigger further stimulus.”
“It’s not an ‘end-of-the-world’ scenario in China,” says Tom Price, global commodity analyst at Morgan Stanley. “Sure, the last 10 years of demand growth have been almost entirely dominated by China. But now it’s more complex and has a broader base because the U.S. economy has arrived at last and Europe might even surprise everyone.”
Commerzbank, a global banking and financial services company with headquarters in Germany, says the situation may not be so grim for the red metal. “In our opinion, copper has now been oversold and many risks are already packed in,” the firm stated in a commodity research note put out on Friday. “Any shift in sentiment among speculative financial investors would no doubt contribute to significantly rising copper prices.”
Commerzbank points to several reasons why it feels copper can recover:
- Market tighter than it looks: According to data from the International Copper Study Group (ICSG), the global copper market was in a “seasonally adjusted deficit of 532,000 [tons]” for the first 10 months of last year. The organization also reported tight supplies of high-grade copper scrap.
- Surplus predictions optimistic: While the ICSG is predicting a surplus, Commerzbank isn’t so sure. It notes in its report that wage negotiations are set to take place for mineworkers in Chile, the world’s largest copper producer, and that production could be curbed if strikes occur. Furthermore, the firm points out that Codelco and Freeport-McMoRan have cut investments due to low prices for the red metal, and suggests that “hardly any new projects are likely to be pushed forward at the current low prices.”
- Is Chinese demand really falling? Despite slower economic growth, Commerzbank sees market watchers anticipating stimulus measures from China’s government. For example, as others have previously pointed out, the country recently announced an investment of roughly $70 billion in electrical infrastructure, and that will require plenty of copper. Beyond that, Commerzbank believes that current low prices could spur demand as China’s State Reserve Bureau could take advantage of the situation to buy up copper.
Global Economic News* That Could Impact Copper
- “What we want is a deal. But if there is no deal…then we have the obligation to go to Plan B. Plan B is to get funding from another source,” said Greek Defense Minister Panos Kammenos. “It could be the United States at best, it could be Russia, it could be China or other countries.” Meanwhile, Greece is in the middle of trying to negotiate a deal to stave off a funding crunch, as it tries to buy time to negotiate with its creditors.
- Chinese shares gained for a second day [this week] as lower-than-expected inflation raised the prospect of further monetary easing. China’s consumer-price index rose 0.8% on year in January, down from an already low 1.5% rise on year in December, according to data from the National Bureau of Statistics. Producer prices, which have been dropping for nearly three years, declined 4.3% in January on year, the sharpest fall since late 2009.
- The recent surge in oil prices is just a “head fake” and West Texas crude as cheap as $20/bbl may soon be on the way, warned Citigroup, lowering its crude oil forecast again. Despite declines in spending that have helped oil prices rebound in recent weeks, U.S. oil production is still rising, Brazil and Russia are pumping oil at record levels, and Saudi Arabia, Iraq and Iran have been fighting to maintain their market share by cutting prices to Asia, said Edward Morse, Citi’s global head of commodity research.
*News pulled from Seeking Alpha’s Wall Street Breakfast.
Copper Prices
Copper for delivery in three months on the London Metal Exchange traded little changed at $5,675 a metric ton ($2.57 a pound) at 10:10 a.m. in Hong Kong. Prices rose 0.4 percent to $5,673 a ton on Monday, the biggest gain since Feb. 3.
In New York, copper futures for March delivery slid 0.1 percent to $2.579 a pound, while the metal for April in Shanghai gained 0.3 percent to 41,370 yuan ($6,623) a ton.
Further Reading
Has the copper price bottomed out? Is it time to buy? Click here to read an interesting article looking at the future of copper.