Copper for delivery in three months dropped 5.3 percent Wednesday to settle at $5,548 a metric ton ($2.52 a pound) on the London Metal Exchange, after dropping as much as 8.6 percent, the biggest intraday loss since October 2008. It then rebounded on Thursday by rising as much as 2.5 percent to $5,685.50 a metric ton on the London Metal Exchange and was at $5,631 in Hong Kong.
Copper is the worst performing non-energy raw material this year on the Bloomberg Commodity Index (BCOM), which has tumbled to the lowest in 12 years amid forecasts for China’s slowest economic growth since 1990. Goldman Sachs Group Inc. this week highlighted tighter credit in the country, the world’s biggest metals consumer, as a challenge for copper prices.
A sharp fall in the price of copper Wednesday left the red metal at a more than five-year low. Even after recovering slightly, copper is down 16% since the middle of last year, when oil started its slide. Macroeconomic angst could mean further volatility, especially if Chinese economic data surprises in either direction. A seasonally quiet period for copper, as buying slows ahead of Chinese New Year in February, leaves the metal vulnerable to negative sentiment. Wednesday’s drop also represents a sixth consecutive day of falls for copper, and is the longest losing streak since February last year.
“As goes China, as goes commodities, as goes copper prices,” Jeff Sica, who oversees $1.5 billion as chief executive officer of advisory firm Circle Squared Alternative Investments in Morristown, New Jersey, said in a telephone interview yesterday. “Copper prices are going to decline based on an economic slowdown in China before they do in the U.S.”
The Chinese economy is going through a massive slowdown as the government tries to transition from an investment-based economy to a consumption-based economy. That means less building and infrastructure development in general. In this case, that probably also means Chinese copper demand isn’t coming back anytime soon.
The bulk of Wednesday’s losses occurred during Asian trading hours after the World Bank cited concerns over a “disorderly slowdown” in China and cut its outlook for global growth in 2015. The red flags in the World Bank’s report hit copper hard because the metal is used across a wide swath of industries, from smartphones to automobiles, making it a popular economic barometer for many investors.
China is crucial to the whole picture, accounting for about 45% of global demand for copper as the metal’s wide range of uses for wiring, piping and in general industry make it essential to an economy where infrastructure is expanding. Although China is still growing fast compared with advanced nations such as Britain and US, growth is nevertheless slowing and fears of a hard landing remain. Growth last year is expected to have been less than 7.5%, missing Beijing’s target for the first time since 1998.
Market participants say aggressive selling by Chinese hedge funds that are virtually unknown in the west played a powerful part in pushing the metal down more than 7 per cent to its lowest level since 2009.
Similar to a sudden drop in March 2014, the fall signals the growing importance of Chinese funds in commodities. Groups said to be active in metals markets include Zhejiang Dunhe Investment and Shanghai Chaos Investment.
Analysts are divided on whether copper prices will go even lower. Max Layton, metals analyst at Goldman Sachs, said in all likelihood they will. He said the copper price is trying to find a new equilibrium in an environment of heightened demand uncertainty and cost deflation. “While this level is difficult to predict, we believe that the risks to prices and our forecasts are still heavily skewed to the downside,” he said, citing continued weakness in demand from China.
To Daniel Alpert, founding managing partner of investment banking firm Westwood Capital LLC, the plunge in the price of oil, and now copper, is a clearer sign of inadequate global demand rather than a sudden leap in supply. “The imbalances have been there through and after the Great Recession, but have been masked to some extent by central bank mega-easing. The mask has been removed and the markets are reacting accordingly,” he said.