Double whammy for copper

As copper prices are a reliable barometer of the global economy’s health, weakness in the same did not come as a surprise given flagging Chinese economy and rising prospects of US rate hike in 2015.

The red metal ,which was hovering around $6,000 a tonne levels in the initial part of 2015, came crashing down to six year low near 4,800 in the latter half as China, which accounts for 40 per cent of the world’s copper demand, slowed to a growth rate of 6.9 per cent in the third quarter, the slowest pace of expansion since the financial crisis.

Besides, string of weak economic data releases from China just added to the woes.

Moreover, supply side offers no respite as latest figures by National Statistics Bureau showed China’s refined copper production rose 1.9 per cent in October from the previous month, gaining for the third straight month and hitting a four-month high, despite maintenance at some smelters and slow domestic demand.

Besides, demand seems to have taken a hit as China’s General Administration of Customs showed imports of copper and copper products for the first 10 months of 2015 fell 4.2 per cent to 3.82 million tonnes (mt) from the year-earlier period.

To buoy the metal, major global producers announced output cuts and curtailed expansion plans. Glencore, the world’s third-largest copper miner, said it will eliminate an additional 55,000 tonnes of output by the end of 2017.

Additionally, Freeport announced a 40,000-tonnes-per-year cutback at the Sierrita copper mine in Arizona, while Chile’s Codelco has significantly scaled back its expansion plans.

As a result, recent data by the International Copper Study Group forecast the total refined copper mine production to increase by only 0.8 per cent in 2015 after increasing by 7 per cent in 2014.

The forecast of a 360,000-tonne surplus of copper production in 2015 released in April has been revised to 41,000 tonnes.

Also, the 2016 production estimate has been reduced to a deficit of around 130,000 tonnes against an expected 230,000 tonnes surplus in April 2015.

Another major setback for copper prices came after dollar jumped to three-month high as FOMC, in its latest meeting, significantly raised the prospect of a historic rate rise at its next meeting in December by removing cautious statements about unstable international markets could affect the US economy.

Further, recent hawkish comments by Fed policymakers in addition to Fed Chair Janet Yellen who said that “liftoff” in interest rates in December was a live possibility unless economic data weakens drastically only worsens the situation for dollar denominated metal.

Overall, copper prices are likely to remain in downward spiral for the coming months as weakness in Chinese economy vis-à-vis rising prospects of US rate hike will continue to bother the already beaten up metals space.

Hence, we expect copper prices to trend lower from a two month perspective and LME Copper (CMP: $4,755) prices can possibly decline towards $4,500/4,200 a tonne while MCX Copper (CMP: ₹312/kg) prices may fall towards ₹298/280.

The writer is Associate Director-Commodities & Currencies Business, Equity Research & Advisory. Views are personal.

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