Last few months most tabloids, journals and sell side notes have been obsessed with Oil and the implications for various producers, consumers, exporter nations and what it means for their central bank policies. Yawn! In the meantime, Copper, Iron Ore, and Thermal Coal seem like the step brethren of the Commodity family. As much as we all would like to call the bottom in Oil (present company included), investors need to make sure they are not blind sided by the opportunities that present themselves elsewhere. LME 3 month copper price has been ranging between $5400-$5800/t and given the weak Chinese trade data released this past week together with inventories rising, and stronger USD across the board, it is surprising Copper has not fallen more.
Overall Chinese imports of most Commodities weakened year over year during January ’15. With regards to Copper, after rising month on month for seven consecutive months, January’s total copper imports dropped to the lowest level since October. China’s construction sector is slowing after many months of weak property sales. Property related copper consumption accounts for ~ 50% of total Chinese copper demand – dominant copper demand driver. December ’14 weak property data shows China’s sector remains in a destocking cycle hence construction activity is expected to remain relatively weak over the next 12 months, leading to a downside risk to copper prices.
Some bulls like to use the marginal cost of copper production argument to establish some sort of floor. It seems a futile argument to hang your hat on, especially if the input prices keep falling. US monetary policy is set on an upward trajectory vs. the likes of Emerging markets that continue to cut their interest rates in order to boost growth and fight deflation. Hence Copper producing countries are faced with lower local currency vs. the USD that will lower their labor costs, and together with falling oil prices challenge the “marginal cost of copper production” support argument.
The sharp fall in the copper price over the last few weeks has corresponded with a steady rise in the LME inventories – up 33% in the last 4 weeks to 370k tonnes. With Chinese data weaker, property inventory elevated, and cost deflation, copper prices seem at best to be capped here with risks of it breaking the low end of its recent trading range.
To use a cricket analogy, sure it’s great to aim for the sixers, but in the meantime all the singles can add up.
