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Fed Up, Or Down? Investors Take a Wait-and-See Approach

By Jim Williams

Copper prices rebounded slightly Tuesday after falling to a five-day low to start the week. Experts say the higher prices are based on signs of weaker supply and news last week of Glencore’s decision to shut down two of its copper mines.

Glencore shocked investors with its decision to shut two large copper mines in Africa, taking roughly 400,000 metric tons of copper supply off the market. The move follows decisions to cancel expansion projects by Freeport McMoRan Inc. and Chile’s Codelco, which will put a damper on future copper output.

“When you hear that these giant mining companies are shutting mines and walking away from deals, that does something,” said Ira Epstein, a broker with Linn & Associates in Chicago. “If they succeed and they’ve got less copper, the idea is that the prices will be buoyed,” he added.

Prices did push higher Tuesday as some traders focused on signs of the news of weaker supply from the world’s copper mines. According to Dow Jones, Citigroup estimates copper production decreased by approximately 1.54 million metric tons this year because of weather and other disruptions such as worker strikes.

“We believe there has been a clear dislocation in the recognition of reduced output growth versus copper prices,” David Wilson, Citigroup’s metals analyst, told Dow Jones. Wilson also predicts copper prices should climb to $2.58 a pound in the fourth quarter.

Again, China is a key factor in the price of copper. Monday’s drop was attributed to data showing Chinese industrial production and fixed-asset investment were disappointing in August. That news caused concern about demand from the world’s top copper buyer. While demand has been weak in 2015, China still needs to import three million tons of copper a year to meet its domestic requirements. But for most of this year it has not been profitable to move copper cathode from bonded warehouses into the mainland because the difference between domestic and offshore interest rates is getting smaller.

Two things have changed in recent months to help. First, premiums in China—the charge consumers are prepared to pay for immediate delivery of metal on top of market prices—have risen as consumers were forced to draw down on domestic stocks.

Second, China devalued its currency, a move that scared commodity markets across the globe.

Overall, global markets remain mixed while waiting for the U.S. Federal Reserve’s interest rate decision this week. A majority of economists think the Fed will remain steady, although many surveyed think the decision is considered a ‘toss-up.’ We will keep an eye on the Federal Reserve meeting and report its decision and what impact that might have on the price of copper both short- and long-term.

Further Reading

In the Long Run, Copper Remains a Solid Bet—Metal Miner

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