Copper prices plummet, dragged down by China

China , Commodities , Copper , Metals Mar 24, 2014 2 Comments

CopperCopper prices have fallen sharply last week on the London Metal Exchange, falling to their lowest level in more than three and a half years with investors worried about the current state of the Chinese economy.

Fears that have weighed more heavily on all industrial metals and base metals as China is the world’s largest consumer of these commodities and came to dominate copper demand over the past decade, consuming five times as much as No. 2 user the US

Analysts fear that the Chinese economy is facing a significant downturn as the government is trying to rein in rising credit, lower overcapacity and protect the environment from industrial pollution while moving to a more consumption-based growth model.

Copper, considered a barometer of industrial metals market, reached Wednesday its lowest level since June 2010, at $6,376.25 a ton.

Already 2 weeks ago, weakness in copper occurred exactly in line with China‘s first default on a domestic bond (Chaori Solar). While the company was small, the concern was that the default could set off a domino effect, with lenders pulling back and corporate borrowers unable to roll over their considerable debts.

Then, there were reports that another Chinese company electrical equipment maker and solar panel manufacturer, Baoding Tianwei Baobian Electric, saw its bonds and stocks suspended from trading after reporting losses for a second year running.

Investors are also worried after seeing China‘s exports unexpectedly falling 18.1 percent in February to 114.1 billion dollars, while imports rose 10.1 percent to 137.08 billion. Analysts expected a 6.8 percent increase in exports and a 8 percent rise in imports, resulting in a 14.5 billion dollar trade surplus.

Similarly, even if Chinese industrial production increased 8.6% in January and February compared with the same period of 2013, it is its weakest pace for 5 years which suggests a lasting economic slowdown.

Also, while copper was previously used as collateral for loans in China, as its value decreases, concerned borrowers were forced to repay their loans and banks are reluctant to grant new loans under such conditions.

Finally, friday on the LME, a ton of copper for delivery in three months traded at $6,490 against $6,854 one week earlier.

“In general, copper had been a good barometer for the global economy, but in the last decade or so, with China reaching this ascendancy in terms of being the mecca of copper, the China story matters much more,” John Stephenson from First Asset Investment Management Inc. in Toronto, said in a telephone interview. “With all due respect to copper, it’s probably lost its right to be considered a Ph.D. in economics from a forecasting perspective.”

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.

2 Comments

  1. Rob

    Thanks for the informative post.
    Based on your experience, what would you expect going forward, higher or lower prices for the rest of 2014?
    China doom and gloom news seems to me that is already discounted in the price of copper right now.
    I would be glad to hear your opinion.
    thanks
    -Rob

    • Hi Rob,

      Thank you for your comment.
      However, Propurchaser does not forecast prices: we report only historical figures and let our clients draw their own conclusions.

      Cheers,
      Rod.

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