Google+ Followers

Monday, 6 July 2015

Copper’s Prolonged Weakness Testing Patience of Investors

The pressure of huge stocks and declining consumption demand has led to a steady decline in the global as well as domestic copper prices. The slowdown of the key global economies has led to a significant shrinking of copper demand. The major factors pulling the copper prices off-track are the slow Chinese demand, uncertainty in the European market, weak US demand simultaneously compounded by an increased supply of recycled copper. 

The global trade in copper has shown a significant weakness. One of the major reasons for this has been subdued demand from China’s State Grid Corp, the world’s largest utility, which had previously planned to spend more than Renminbi (rmb) 40 billion on electrical grid constructions in 2015. With the current state of growth, the Chinese demand is likely to slow down to 4 per cent in 2015 against 5.5 per cent reported last year. As per data from the Shanghai Futures Exchange, which monitors the stock-levels of copper in China, the amount of copper stored in the country jumped from 4 per cent of global stock in 2009 to 38 per cent last year.

The interest rates in China being higher than international levels – provided a popular trade practice i.e. of borrowing money at the dollar interest rate using a letter of credit from a domestic bank to import commodities. However, with an eye on providing support to the equity markets , last month China cut interest rates again - the fourth time in eight months, with the benchmark one-year lending rate now at a record low of 4.85 per, thus intending to halt the collapse of domestic equities. China’s recent moves to cut interest rates would also “significantly reduce” its demand for copper, thus affecting global producers. Owing to increasing importance attributed to the Shanghai copper holdings as a proportion of the global copper market, the unwinding or change in interest rate differentials would have significant impact on global commodity market pricing and trading. There is strong evidence to conclude that copper stocks have been piled up at warehouses mainly “to facilitate a carry trade under capital controls.” The “carry trade” involves speculators borrowing in US dollars to buy Chinese assets, and they often do so with leverage and through convoluted means, some using the same stockpiles of copper or iron ore as collateral. As per an unofficial estimate, as much as 70 per cent of China’s imports of refined copper were used to obtain financing rather than for consumption. This circle of imports - financing – imports has distorted the picture of copper consumption in China, the world’s largest consumer, and led to a fictitious demand inflation scenario amidst increased cases of multiple funding on same stock. If such incidents do come to light, China’s imports of copper could fall and that would enable the global market to get a better picture of true demand for the metal in the country.

The recent development in Greece has further strained the already weak sentiment in the industrial metal market and it fell sharply as Greece’s vote against austerity. At a referendum ending at noon Eastern Time on 5th July, Greece rejected an austerity package that European leaders insisted that the country implement in exchange for continued financial assistance. With 90 percent of the vote tallied, 61 percent of voters rejected the European program. The current situation as also likely new developments are likely to plummet demand, inflation would soar into the double digits, imports such as food and oil might need to be rationed, companies that borrowed in euros might go bankrupt, and the government would have to balance its budget overnight. Should Greece exit the euro -- temporarily or more permanently -- there’s nothing to prevent the IMF (and Brussels) to come up with assistance programs much as it has done in the past for Argentina. It’s just a matter of time, till Greece decides its next move, till then the global economic and the copper market (as perhaps other metal markets too) would continue to feel the cold of economic uncertainty.

Notwithstanding the above, despite the negativity being present in the copper market, many events are unfolding which are supporting the long term stable to bullish trend in copper prices. Copper is widely regarded by investors as an unrivalled barometer of the state of the global economy because of its use across manufacturing and heavy industry. Copper’s fortunes depend not only on demand from China, even though that nation is the world’s largest consumer, accounting for 42 per cent of global trade. The red metal is also crucial input product for build-out of the electricity grid, as well as wiring used in cars and consumer goods. Producers also hope that copper will have a future in electric cars, wind turbines and high-efficiency power transformers. Another plus for copper could come from shrinking supplies of high quality concentrate in the first half of this year, due to increased mine outages and flooding in Chile. Based on these facts, one can expect that any further supply side problems will only support copper prices, even if Chinese demand weakens further.

In 2014, for the first time in four decades, the global economy grew along with energy demand without an increase in global carbon emissions. According to energy policy group REN21’s just-released Renewables 2015 Global Status Report, which attributes this stabilization to increased penetration of renewable energy and to improvements in energy efficiency. What this means is that as the world’s population continues to grow, and as more people in developing and emerging countries gain access to electricity, the role alternative energy sources such as wind, solar and geothermal play should skyrocket. Between now and 2040, a massive $8 trillion will be spent globally on renewables, about two thirds of all energy spending, New Energy Finance. Solar power alone is expected to draw $3.7 trillion. This is very positive news indeed for the metal which is necessary for the conduction of electricity in all energy technologies, whether they be traditional or alternative. The use of some carbon-emitting fossil fuels—coal, for instance—will likely drop off over the years, but copper will remain an irreplaceable component in our ever-expanding energy needs.

Currently, global copper consumption is poised to increase not just because electricity demand is growing, but also because the new energy technologies typically require more of the red metal than traditional sources. Each megawatt of wind power capacity, for instance, uses an average of 3.6 MT of copper. Electric trolleys, buses and subway cars use about 2,300 pounds of copper apiece. Where we’ll see the most significant growth, though, is in the production of hybrid and electric cars, which use two to three times more copper than internal combustion engines.

At present about 60 per cent of the copper China purchases goes toward the property sector, an area that’s finally starting to show signs of life after almost a year of falling prices. A bright spot for copper demand, however, is the Eurozone, whose own flash PMI (Purchasing Manager’s Index) hit a 49-month high of 54.1. The expansion was led by Germany and France, which saw output rising at its sharpest rate since August 2011. The Eurozone PMI is typically based on approximately 85 per cent – 90 per cent of total PMI survey responses each month and is designed to provide an accurate advance indication of the final PMI data. In the coming years, more and more people all over the globe will gain access to electricity, a growing percentage of which we will derive from renewable sources. More electricity would certainly lead to increased demand for copper and other base metals.

Blog Archive