Instead, many analysts say prices for the industrial metal aren’t likely to move much from their current levels near $3 a pound anytime soon, with anxiety over China’s credit market and a slowdown in its economic growth likely to persist despite speculation of possible stimulus measures.
This year’s losses come on top of a 7% decline for copper futures prices last year and a nearly 23% plunge for 2011. They climbed more than 6% in 2012.While the China growth story remains uncertain, copper is going to hold a negative direction of volatility .Volatility will likely be the name of the game here.
Copper futures on Comex closed at $2.92 a pound on March 13, the lowest settlement in nearly four years. Prices have climbed a bit since then, closing at $2.99 on Thursday, amid expectations that Chinese authorities will issue some sort of economic stimulus. That would help boost demand for copper.
But Chinese authorities are in a difficult position. A major stimulus program would encourage further speculation and unproductive growth – something that the Chinese have been trying to discourage since the last major stimulus in 2009.Besides, given the recent slowdown, it will be hard to reach their roughly 7% growth target without further action and may lead to more public bankruptcies and credit concerns.
Slower economic growth has been the most obvious drags on copper price. Talk over stimulus measures to help offset that slowdown have helped to tame copper’s losses for now. Will it last is also a question.What looked like the start of better growth in the fourth quarter of last year has since stalled out. Investors who had purchased copper late last year believing that the growth would continue have likely reversed course as economic data have come in on the weaker side. And will continue to come in lower.Concerns over China’s growth intensified when data released this month showed an unexpected 18.1% fall in the nation’s exports in February from a year earlier.
Declining construction and manufacturing activity owing to inadequate demand in a slow-moving global growth environment has significantly pressured copper prices lower, The latest batch of disappointing trade and manufacturing data suggest more of the same continued lack of fundamental demand support for copper.
The China slowdown hasn’t been quite the disaster that some expected it to be anyway. The The Chinese end-game is not near yet. They have enough reserves and firepower to keep the economy surging and one need not be surprised to see copper at over $3.25 a pound in two months and it could end the year over $3.40.But the outlook for copper has been tied to China’s in more ways than one. Copper has had a strong role in China’s credit market too
Citing China economic growth of 7.5%, Australia’s Fortescue Metals is upbeat on iron-ore prices. Inventories of the metal have been an important source of obtaining non-bank related financing. This ‘shadow financing’ has, in turn, been used to fund investment in both longer-term projects as well as more speculative activity.
A string of recent high-profile bankruptcies and near-bankruptcies have caused investors to rethink their willingness to take risk and extend credit. That has in turn put pressure on the availability of copper-related financing and existing inventories.
A rural lender in China’s eastern Jiangsu Province was reportedly hit by a bank run this week after rumors emerged about a possible bankruptcy. The report came after China’s first domestic bond default earlier this month, when a solar-power company failed to make interest payments on its bonds.
Against this backdrop, growing supplies of, and falling prices for copper can bode ill for the metal’s outlook. In a note earlier this month, Barclays commodity analyst Sijin Cheng said that after a tour of Chinese smelters, traders and downstream producers, she found that warehouse-stored copper was on the rise.
She didn’t appear too concerned, however. End users of the metal have been reporting low raw material inventories and physical buying could pick up quickly if industrial activity normalizes. They have a second-quarter forecast of $7,300 a metric ton (about $3.31 a pound) for copper.
That doesn’t offer much consolation for the market, however. Fears of a credit crisis and the real possibility of more defaults to come could force increased liquidation of the metal, resulting in an oversupplied market and further downward price pressure. And together, concerns over forced selling of copper from commodity financing and less-than-impressive growth expectations by Chinese standards, absent additional government stimulus, render the trajectory for copper prices, in the near term, very bearish.
The data which is due next week will show whether the story continues of there is a change for the better. Either way China is at a cross road, but the damage has been done to the 7.5 % growth theory.