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Monday, 7 March 2016

Copper Recovered Partially in Absence of Immediate Threats to Global Economies

Since, last couple of years the copper market has been marred by the declining demand from China and global economic slowdown being triggered by China, Europe and Latin American countries. The Chinese have been noticing a significant fall in demand amidst slow GDP growth (The downswing in commodity prices was sharp in 2015, particularly following the financial volatility that started mid-August, after China’s shock devaluation of the renminbi – with investors fretting about the country’s slowing economy. China registered a 6.9 per cent gross domestic product (GDP) growth rate in the third quarter, down from 7 per cent in the second quarter, the weakest rate since the 6.2 per cent expansion recorded in the first quarter of 2009 at the height of the global recession), European economy is been pressured by the day-by-day declining strength in Euro and weak economic health of few European nations and Latin American Countries who thrived on Increased Copper demand from China (~ 45 per cent of Global Consumption Demand) as the dollar continues to strengthen and demand continues to dwindle. 

Major copper producing country, Chile’s economy is feeling the full impact of a three-year decline in copper prices as mining output slumps, manufacturing shrinks and the government reduces spending plans to account for lower revenue. Copper output tumbled 14 per cent in January from the year earlier, leading an 8.3 per cent drop in industrial production, the national statistics agency. 

Long term fears continue to feel the grip of the bears. Emerging-market economic growth has mostly slowed, undercut by China’s weaker commodity appetite. Brazil’s economy had its biggest contraction in 2½ decades last year. Russia has been hit by a combination of low oil prices and international sanctions. South Africa, a big mineral exporter, has high unemployment and gaping budget deficits. Investors also worry that developing nations are struggling with high levels of dollar-denominated debt, which has become difficult to service after a two-year-long dollar rally. Standard & Poor’s Ratings Services said corporate defaults in emerging markets rose in 2015 to their highest levels since 2004. Meanwhile, Beijing could be forced to devalue its yuan under pressure from heavy outflows or in a move to boost its economy. That could have ripple effects by compelling other countries to lower the value of their currencies to remain competitive. Both the IMF and the World Bank point out that China’s transition away from investment-led growth toward an economic structure focusing on consumer-driven expansion has been instrumental in weakening base metal prices. This trend is expected to continue in next couple of months. The plunge in commodity prices was accompanied by a sharp slowdown in economic growth among commodity-exporting emerging market and developing economies. IMF data shows real GDP growth in this group of countries decreased to 4.6 per cent in 2014 from 6.3 per cent in 2011.

In the recent development China has reduced the Reserve Requirement Ratio (RRR). Since their peak in 2011, copper prices are down well over 50 per cent. Now, there’s light at the end of the tunnel which might support the copper prices in the coming days. In January, 315,000 tonnes of refined copper were imported into China—up 16 per cent from a year ago. In December, refined copper imports were the highest on record at approximately 423,000 tonnes. Moreover, if we look at the demand pattern of copper concentrate which is the raw material used to make copper metal a very positive trend seems to be emerging from China. In January, 1.17 million tonnes of copper concentrate were imported. It was the sixth consecutive month that more than a million tonnes were imported. Copper’s supply and demand fundamentals have become promising during this quarter. The metal’s picture was improving given 200,000 tonnes of planned first quarter output cuts by China’s copper smelters, further supply curtailments by Glencore and Freeport, and increased buying by China’s strategic supplier.

Elsewhere, in Europe despite all the negativity about the Chinese economy slowing down, we see China as a buyer of copper. Sentiment was brighter but still fragile, after a failure by a weekend meeting of the G20 group of leading economies to come up with concrete, new measures to boost growth. Emerging markets, which last year slumped, have rallied in recent weeks, amid a rebound in commodity prices and increasing confidence the U.S. central bank won’t soon raise interest rates. The turnabout is fueling a number of assets. Stocks in emerging markets are up 12 per cent since late January, according to the MSCI Emerging Markets Index, erasing most of the declines they sustained during a selloff at the start of the year. Currencies such as the Mexican peso and Russian ruble also have roared back from recent lows, up 7 per cent and 13 per cent, respectively, against the U.S. dollar. 

Most notably, the rebound in oil, metals and other raw materials has given a boost to these commodity-exporting nations and raised hopes that the worst of the commodity declines are over. High quality global journalism requires investment. After a momentary stagnation on the lower side, oil prices have started to climb amidst reports from Department of Energy being brushed aside by investors who are increasingly prepared to bet the worst of a 20-month long price rout is over. Prices for Brent crude are up nearly 33 per cent from January lows and Copper prices are up nearly 14 per cent. Prices have been hit by slow demand over the Lunar New Year, and global growth concerns that have flattened trade. With factories ramping up ahead of China's seasonal demand peak in the second quarter as copper's supply and demand fundamentals are likely to improve on the back of seasonal demand recovery from power grids and home appliance sectors, as well as resilient growth in the auto sector. Recent announcements from China, the world’s largest consumer of commodities, that it will continue to support economic growth, have helped support prices. 

Though, the above news are supporting the positive movement in the prices there are few bearish news too which are destined to pull down the copper prices which may not lead to materialization of expectation of higher demand after Chinese New Year. Although copper’s price has dropped 50 percent since 2010, some companies aren’t shelving production plans. Miners, including in Peru and China, are planning 7.88 million metric tonnes of new copper supply by 2020, equal to an increase of about 44 per cent over 2014. Thus we can conclude that the copper turmoil is far from over and the long-term investors are still advised not to venture with new investments into the sector, though the concentrate market is still an attractive investment avenue amidst increased processing demand.

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