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Will Copper’s Bubble (Continue To) Burst?

Will Copper’s Bubble (Continue To) Burst?

By Jim Williams

Copper prices tumbled to start the week after disappointing economic news out of China.

The most glaring news is the Chinese economic growth dipped below 7 percent for the first time since the global financial crisis. Concerns were deepened by declining growth rates in key segments of the economy that typically drive copper demand. China’s industrial output in September climbed 5.7 percent from a year earlier, compared with a 6.1 percent gain in August. A separate report showed the slowest quarterly growth in China’s economy since 2009.

While China’s GDP number slightly outpaced economists’ expectations of 6.8 percent, the numbers added to doubts that Beijing can meet its year-end target of growth of about 7 percent.

“It doesn’t appear that we’ve hit the bottom in China’s decline, and under that premise the market is still concerned about demand for copper going forward,” Dave Meger, director of metals trading with High Ridge Futures in Chicago told Nasdaq.com.

“The latest copper/commodities crisis comes as no surprise to me because I’ve been warning that China’s unsustainable economic bubble was helping to inflate a bubble in commodities that will end disastrously,” says Jesse Colombo, economic analyst and contributor to Forbes. “Copper’s bounce since the beginning of October has helped mining stocks to rebound off their lows, soothing some of the fears that investors had in September. Unfortunately, there are worrisome signs that copper’s bounce…may be short-lived.”

“China’s economic activity dominates the short-term price outlook and sentiment. Data in 2015 are overwhelmingly bearish for copper’s price outlook,” analysts at Morgan Stanley said in a report.

Colombo looks to the U.S. dollar as one of the strongest influences on the price of copper. “The dollar’s eventual breakout from this pattern, up or down, is likely to be an important driver of copper prices,” he states. “Due to their inverse relationship, a bullish dollar breakout would be bearish for copper, while a bearish dollar breakdown would be bullish for copper.”

Source: Barchart.com

“If copper’s bear market continues, barring a massive Chinese stimulus, for example, the 2009 low of approximately $1.25/lb. is the next obvious support level and price target to keep an eye on,” surmises Colombo.

Barclays forecasts that copper prices will average $4,850 in the fourth quarter of the year due to the bearish market sentiment and weaker demand from China.

Waiting in the Wings?

Contributor Andrew Hecht says in his Seeking Alpha article published on Monday, “The Chinese are in a perfect position when it comes to commodities in many ways. Prices of many commodities have halved or more since the highs a few short years ago. Commodity producers are cutting output at these lower prices, and companies like Glencore are selling off producing assets. It is a good bet that the Chinese will be the first in line to purchase these assets to increase and insure their supply flows for the future. Today, while the Chinese economy is certainly slowing compared to recent years, China is waiting in the wings as a buyer of raw materials. This sets up what could be a great contrarian trade for the years to come.”

You can follow Hecht on Twitter at @technomentals.

Please check out Jesse Colombo’s in-depth look at the copper bubble here. You can also follow him on Twitter, at @TheBubbleBubble.



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