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Will Slashed Interest Rates Affect Copper Prices?

By Jim Williams

Earlier this week the People’s Bank of China (PboC) lowered benchmark interest rates. This is the third reduction in the last six months.

The PBoC also reduced the reserve requirement for banks, a move expected to boost liquidity by $200 billion. This is good news for commodities –especially copper. Analysts predict copper’s fundamentals are expected to improve sooner-than-anticipated, thanks to supply disruptions and production cuts.

Jean-Sebastien Jacques, head of copper at mining major Rio Tinto, told the Financial Times we could see the market balance sooner than predicted.

“It (copper) was expected to be oversupplied but because of disruption in the marketplace and because of decisions made by the industry to slow down some projects we could face a situation where the market is balanced this year,” he said.

“If you had asked me the question in December last year I would have said the inflection point would be three or four years down the road and today it is likely to be 18-24 months down the road,” he added.

In October, a Reuters survey showed that the copper market will end up with a surplus of 350,000 tons in 2015. Recent revisions to that figure now predict the surplus to be around 100,000 tons.

Improved Outlook from China
China’s sudden desire to support economic growth has further improved the outlook on the demand side. As mentioned above, the PBoC has cut interest rates three times since November, most recently this past weekend. The sudden change in stance from China’s central bank sends a message that policymakers in the country are not prepared to compromise near-term growth for structural changes to the economy. In the first quarter, China’s GDP grew 7%, which is the target for all of 2015, but given the deflationary pressure China’s economy has been facing, policymakers have apparently decided to introduce easing measures.

Copper hit a five-month high of $6,479 a ton last week after rising for nine straight days before slipping to end the week at $6,388.

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