By Jim Williams
Analysts at Barclays are predicting investors may have a “rush for the exits” as they back away from commodities, especially copper and oil – as they predict a drop of as much as 25 percent!
A note issued by the bank said that although investors have been attracted to commodities so far in 2016, returns are unlikely to be sustained in the second quarter of the year.
“This could make commodities vulnerable to a wave of investor liquidation that we estimate could, in a worst case scenario, knock as much as 20 to 25 percent from current price levels,” the note said.
If the prediction holds true, that would drop copper back down near the $2 mark, or the low $4,000’s from its current level of near $5,000 per ton.
“In the absence of any concerted fundamental improvements, these returns are unlikely to be repeated in the second quarter, making commodities vulnerable to a wave of investor liquidation,” said Kevin Norrish, an analyst with Barclays PLC. “Steeper declines would probably require a significant change in the mood music of the global economy, with the biggest threat being the potential for another build-up of concern over a possible devaluation [in the Chinese yuan].”
Norrish estimates that more than $20 billion flowed into commodity investor products during January and February, the strongest start to a year since 2011.
“Key commodities markets such as oil and copper already face overhangs of excess production capacity and inventories, but also now face another obstacle in the recovery process, that of positioning, which is now approaching bullish extremes,” he said.
That position is what prompted Barclays to predict the sell off as investors may decide to remove themselves from the bullish situation, therefore causing prices to crash.
Norrish predicts the odds of that happening are fairly high, because many recent commodity buyers appear to be short-term speculators rather than buy-and-hold investors as we’ve reported here for months through contributor Jesse Colombo.
Another key player in this is the Federal Reserve. While the threat of continued rate hikes fizzled after the first of the year, a boost in interest rates would most likely strengthen the dollar. That would not be good for the price of copper, as a stronger U.S. dollar makes copper more expensive internationally, which in turn puts a crimp on demand.
Slowing Down New Home Purchases in China
The following chart shows rising home prices on newly built residential buildings in China. The chart would lead some to think the demand for copper would soar, along with the new construction, but it appears to be the opposite.
On Friday, Shanghai officials announced stricter real-estate regulations to try and cool a market where new-home prices soared 21 percent in February from February 2015. Buyers will need to show they’ve been in the city for five years, and some second homes will require down payments of at least 70 percent. The moves come as an effort to keep people from avoiding rules that restrict home purchases to one per household – including some couples going through a fake divorce to double their buying power and more than double their profit!
We will see if the squeeze on real estate will put a pinch on copper.
Further Reading
A great article by Bloomberg sheds some light on the theory of the price of copper centering on China. Is the demand real, or concocted? Click here for the story.
Another good story was posted in the Salt Lake City Tribune last week about copper’s troubles cutting much deeper than weakening demand China. Check out the story in the Trib.
Do you have a story to tell? We are working on an in-depth column on the impact of copper prices on buying habits. If you have changed the way you buy/sell copper for your projects, we want to hear from you. Please contact me at (314) 425-9010, or at jwilli12@att.net. We will do our best to include you in the story.
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