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The Price of Copper Hits 6-year Low…Again!

By Jim Williams

We had to check the date on the headlines. At first glance it appeared they were all from early July when copper hit a six-year low. We wish we could tell you it was a computer problem. It’s not. It seems to be a Chinese stock problem.

China’s central bank placed 120B yuan ($18.8B) worth of seven-day reverse repos into the money market during Tuesday’s session – the largest single day injection in almost 19 months. The latest move raises concerns of whether recent government rescue efforts have succeeded in restoring market confidence.

Apparently, those concerns were felt on the Shanghai Composite Index. China’s main equity benchmark closed more than six per cent lower sending the price of a three-month copper contract on the London Metal Exchange (LME) plummeting 1.6 per cent to $5,032, after having slipped to a six-year low at $4,999.50 a ton earlier.

Investors are concerned the plunge in the stock market could spread to other parts of the Chinese economy, triggering fears that the Asian nation’s demand for the industrial metal will decline. China is the world’s largest copper consumer, accounting for almost 40% of global consumption annually.

“Psychologically, $5,000 is a big, big number,” Stephen Briggs, a metals analyst at BNP Paribas, told the Wall Street Journal. “If it actually…stays below $5,000, then it’s sort of a point for further losses.”

“China’s economy is worse than thought…you have people scared,” said Ira Epstein, a broker with Linn & Associates in Chicago. “Yes, reforms will take place, but the reforms take time, the devaluation is instant. If you drop the value of the yuan, you drop the value of the commodities that it buys, it’s that simple,” Mr. Epstein said.

“The currency move was interpreted as a desperate attempt by the government to buck up its sagging economy by trying to give the export sector a lift,” said Edward Meir, senior commodities strategist with INTL FC Stone, in a note to clients. Many market watchers say the yuan may have further to fall and could notch a 10% devaluation, he added.

Back here in the states, copper for September delivery on the Comex division of the New York Mercantile Exchange was recently down 4.75 cents, or 2.1%, at $2.2735 a pound. Prices are on track to mark a fresh six-year low after closing at $2.3210 a pound on Monday, the lowest level since July 2009.

Further Reading

Andrew Hecht, from Seeking Alpha recently wrote that the economies in the United States and China have been going in opposite directions. In fact, Hecht says China is going rouge. You can read his entire article, A Midsummers Nightmare – China Goes Rouge, here.

Contributor Jesse Colombo goes as far as saying in a recent Tweet, “You know what terrifies me most about emerging markets? Their massive property & credit bubbles haven’t even popped yet despite recent pain.” You can follow Jesse’s bold, but usually spot-on predictions on Twitter, at @TheBubbleBubble.


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