BackCopper looks for the right prescription
Copper prices have come under pressure in 2014 over fears of a slowing Chinese economy at a time when its supply has been projected to increase
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Copper prices have come under pressure in 2014 due to growing fears of a slowing Chinese economy and what that means for metal demand. Worries about a slowdown in demand come at a time when supply has been projected to increase. During this period, China’s crackdown on using metal as collateral in financing transactions too may have affected another source of demand for copper.
Last week saw two announcements offering differing opinions. China’s factory output slipped to a three-month low in August, according to HSBC’s flash purchasing managers’ index (PMI) data, and new orders too suffered a similar fate. If that is an indication that China’s economy is going to slow further, and sectors such as property are feeling the heat, then it is a sign of trouble for dependent sectors such as copper.
But miners seem quite confident about their long-term future. They have been taking steps to combat the slowdown, by delaying new projects (to restrict fresh supplies) and by cutting out unviable capacities from the market.
Last week also saw Glencore Plc, a large commodity trader and mining company, announce its results.
It gave a rather upbeat outlook for the metal. But note that this was before the PMI data was released. Glencore said that a deficit situation for copper cathodes in the first half of 2014 was met by reductions in exchange stocks. This has led to a lowering of inventories.
Though supply is expected to pick up in the second half, Glencore expects shortages in scrap, risks in ageing mines and delays in new mines to keep output in check. On the demand side, it expects continued Chinese strength and improving Western demand to keep supply in check. But China’s economic growth is one variable that continues to elude a pattern. Freeport-McMoRan Inc., a large copper producer, shares this view. Glencore said that a reduction in capital expenditure could see deficit markets again from 2015.
The view that emerges may appear a bit confusing. But that is an outcome of the environment. What companies seem to be saying is that inventories have been coming down in the first half, due to a shortage of copper cathodes. Even then, copper prices have declined. Now, supply is expected to improve, but low inventory levels and better demand conditions are expected to play a balancing role.
The critical point is whether demand can step up to the occasion and ensure that a potential increase in supplies is met by the market. Glencore’s announcement saw copper prices perk up late last week and did not get affected even by China’s flash PMI data. But for that to sustain, the medium-to-long-term drivers too need to align in favour of miners.
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