Copper weakens as China plans capacity reduction

Aluminum , China , Commodities , Copper , Metals Jul 29, 2013 No Comments

CopperAt the end of June, it seemed that bottom was falling out of copper prices. Since then it gained a few percents, but last Thursday on the London Metal Exchange, copper for delivery in three months fell 2.2 percent to $6,863 a ton ($3.11 a pound).

On friday, copper fell again to the lowest level in almost three weeks and lost 0.6 percent to $6,820 a metric ton, the lowest since July 10, and was at $6,838.75 at 10:14 a.m. in Shanghai. Metal for delivery in November on the Shanghai Futures Exchange dropped 2.1 percent to 48,970 yuan ($7,988) a ton.

Traders said sentiment in copper remained bearish after the metal in global markets as concerns that demand from China, the largest user, will decline outweighed country’s plans to reduce production capacity.

Copper had risen on Wednesday and hit one-month high, the fifth session of modest gains, after upbeat economic data from the United States and the euro zone, but gains were capped by signs that China‘s economy is stalling. Data from the world’s biggest economy showed U.S. new home sales hit a five-year high in June and manufacturers increased output in July at the fastest rate in four months. By contrast, manufacturing in China, the world’s biggest consumer of copper, lost momentum in July and its job market weakened.

The Chinese government also announced on Thursday that copper surplus capacity must be idled by September and eliminated by year-end. The move further dimmed demand prospects for the metal after a report on July 24 showed manufacturing weakened more than estimated this month in the Asian country, the world’s biggest copper consumer.
“Everything we hear out of China right now is about a slowdown and how they’re not buying copper, and this announcement just adds to those concerns,” Frank Lesh, a trader at FuturePath Trading in Chicago, said in a telephone interview. “China is a big buyer of copper, so this is a problem.”

China’s industry ministry ordered more than 1,400 companies in 19 industries, including aluminum and copper, to cut production capacity this year, according to a statement on its website yesterday. Canceled warrants, or orders to remove copper from LME warehouses, fell to 316,625 tons yesterday, the lowest since June 21, while those in Asia slid to 194,925 tons, the lowest since June 24.
It’ll take some time before the market can see why this capacity elimination is different from previous efforts and won’t lead to further additions of new capacity,” said Xiong Dabiao, an analyst at Minmetals Futures Co. in Shanghai. “Slow industrial activity continues to weigh on prices.”

China plans to shut down 654,400 metric tons of copper capacity and 260,000 tons for aluminum as part of the initial goal, Bloomberg calculations based on the government’s statement show. The country produced 5.82 million tons of refined copper and 20.8 million tons of aluminum last year, according to Barclays Plc. Supplies are expected to exceed demand for both metals, Barclays forecasts.

Uncertainty about the growth outlook in China, the world’s biggest copper consumer, is likely to dictate the price direction for the metal used in power and construction, analysts said.

Pascal Blanc

Pascal has implemented numerous software solutions in the areas of procurement, sourcing, spend management, supplier evaluation and performance. His clients include Fortune 500 companies in Europe, Asia and North America. He is a co-founder of Source & Procure.

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