Copper in need of a health check

COPPER was yesterday given a short boost. Economic data coming out of China indicated that its inflation rate fell to 1.9 per cent in September, from 2 per cent the month before. However, this news was not enough to dispel worries of a Chinese hard landing, and the metal closed flat at $8,132.4 (£5,060.84) a tonne.

In recent weeks, copper has seen a breakdown in its price, declining from its quantitative easing-induced highs of mid-September, as a weakening dollar aided dollar-denominated commodity markets. Gold and silver have also retraced their Fed-induced bounces. But while these precious metals are generally counter-cyclical, the fortunes of copper are tied to the health of the global economy.

Copper is sometimes referred to as Dr Copper, because of the metal’s industrial applications and its use in so many sectors of the economy – from housing and infrastructure building to electronics and telecommunications – its price action makes it a very good indicator of the health of the global economy. It is the only metal with a PhD in economics. But the doctor’s concern about the health of global demand for industrial metals has checked the copper bull market.

The first quarter of the year saw strong demand for copper, with the International Copper Study Group reporting a year-on-year increase in copper usage of 9 per cent, with refined production up by 4 per cent.

But, with the International Monetary Fund (IMF) cutting its global growth forecasts and the World Bank expressing concerns about a Chinese slowdown, the metal may struggle to resume its bull run in the second half of this year.

In 2012, China has been responsible for over 40 per cent of global copper demand. But these imports accompanied growing copper inventories in bonded warehouses, which will contribute to a slowdown in demand in the short term.

And it’s not just Chinese woes that are denting copper. The US has been stagnant for much of the year, while Europe has declined. But it was concerns over Chinese construction activity over the short and medium term that led Goldman Sachs yesterday to cut its 12-month forecast for copper from $9,000 a tonne to $8,000 a tonne. At the same time, Goldman Sachs downgraded its three, six and 12 month aluminium, nickel and zinc forecasts.

There is some positive news – Chinese central planners recently announced a 1 trillion yuan (£100bn) infrastructure programme, focus on copper-intensive power grid expansion. There are also plans to build 36m housing units in Beijing. But unless Chinese demand is given a sustainable shot in the arm, the copper prices may peak within 12 months.