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It Was Good While It Lasted…

It Was Good While It Lasted…

By Jim Williams

The price of copper had been soaring over the last week, but news out of China brought that run to an abrupt stop.

After surging 7 percent last week for it’s best weekly performance since 2011, the string of positive copper pricing came to a screeching halt thanks to trade data released out of China. Chinese exports were down from $63.2 billion in January to $32.59 billion in February. The $32.59 billion is also more than 25 percent lower than February last year. The astonishing drop was mostly due to a double-digit fall in exports. Adding insult to injury, imports were also down 13.8 percent, the 16th consecutive decline.

Pouring even more cold water on the briefly red-hot copper prices is a series of reports by Goldman Sachs. In the reports, the bank said the 20-month commodity rout had further to run and prices needed to remain lower for longer to rebalance markets that are still groaning under the weight of all of the copper supply.

“Demand hasn’t really changed,” said Jeffrey Currie, Goldman’s head of commodities research. “It takes lower prices to push and keep supply below demand to create a deficit.”

Goldman’s report continued, “Overall we find that the likelihood of a sustained improvement in Chinese demand during 2016-17 is low, and we remain strongly of the view that the structural bear market drives that have contributed to metals declining 20 per cent over the past year and 50 per cent over the past five years remain intact.”

tED contributor Jesse Colombo echoes Goldman Sachs. “As I’ve been saying since the start of the year, I was expecting a bounce in copper because it was very oversold and because the commercial copper hedgers (“the smart money”) were become bullish on it at the same time that the “dumb money” (large trend-following traders) build a sizable short position,” said Colombo.

As you can see in the chart below, copper broke above the downtrend line and $2.20/lb resistance level just as Colombo has been forecasting for months.

Does this mean “happy days are here again!” for commodities, including copper? “I don’t believe so,” adds Colombo. “China’s bubble is still unraveling and has much further to go and the global commodities super cycle has further to unwind, in my view. Nothing has been fixed and I believe we’re seeing a bogus, temporary boom in global risk assets.”

Colombo adds even more insight to copper, but with a look at the dollar playing a part. “I would feel much more comfortable believing that commodities have experienced a sustainable bottom if the U.S. dollar was in a downtrend, but that is definitely not the case – at least for now,” Colombo states. “Though I am not a believer in the fundamentals behind copper’s recent rebound, I respect the trend first and foremost – when trading or taking a tactical view.”

We will keep an eye on the dollar, reports out of China, and the economy in general, and report here next week as we keep you informed on the price of copper.


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