Since 2011 copper price has declined by 40%. Is it caused by fundamental factors? Let us try to analyze copper market trends of recent years and foresee future scenario.
From 1969 to 2003 Chicago Mercantile Exchange (COMEX division) recorded yearly average copper price of $1000-2000 per ton. Annual world copper production jumped from 5.5 million tons to 13.8 million ever since. As global demand expanded alongside, copper prices remained relatively stable. Equilibrium was shattered only after China raised copper imports, led by industrial growth and electrification. Copper is widely used in electrical technology, catalytic alloys and battery cells. Power cable installation and settlements electrification are among basic factors driving up copper demand. It is demonstrated by the China Electricity Output chart (Fig.1). It is evident, that the output was growing for several years: copper power lines total length grows as a result.
Fig.1. China Electricity Output
In 2004, copper futures launched a 1.5-year rally to the green zone, encouraged by increasing demand (Fig.2). The following chart represents dynamics of copper composite continuous futures from 2000 through 2014 (a composite continuous futures is compiled on the basis of futures with the closest expiration dates). To be noted, global copper output showed a sustainable growth, but it was too slow to satisfy skyrocketing surge in demand. The market structure incurred transformation with a new major player – China showed up. In 2006 China imported 740 thousand tons of copper and the annual average price reached $6940 per ton, arousing speculative rush. At the turn of 2006, as supply attained saturation plane, copper apparently pulled back with transition to sideways movement. In 2008, copper price fell as a natural result of demand contraction, caused by global economic crisis and decline in foreign investment.
We believe that Chinese copper consumption had a fundamental effect on global market in 2004-2006. Let us exemplify this point. In response to surge in Chinese copper import in 2008, the price rose to its historical high in 2010. Afterwards imports stabilized.
Fig.2. Copper continuous futures
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The current price drop may be explained by global copper production increase by about 11% in 2013-2014. Meanwhile, imports to China grew only half as much. That led to sagging prices and slackening Chinese positions of a chief player.
Fig.3. Import of copper (columns), price (line)
As of 2006, copper was affected by supply and industrial growth dynamics in China. The period from Q2 2006 to Q3 2010 (Fig.4) illustrates that particularly well. Chinese GDP gained 7.4% and recorded its 24-year low in 2014. According to IMF estimations, Chinese economic expansion in 2015 will continue to slow down, amounting to 6.8%. Naturally, lackluster economy reins in industrial growth. This long-term scenario may be implemented before the end of the year and does not contradict the copper uptrend.
Fig.4. Import of copper (columns), price (line)
To be noted, Chinese Manufacturing PMI in January made up 49.8 and dipped below 50 for the first time since September, 2012 (a sign of shrinking activity). It is no coincidence that in January copper hit its 5.5 year low – $5340 per ton. Later, the fall gave place to an upsurge. Investors expected the Chinese government would undertake measures to encourage production. And it happened indeed. Thus, February, 4 the Central Bank of China partly cut bank reserve requirements, for the first time since May, 2012. This step is aimed at injecting liquidity to Chinese economy and bolsters its expansion.
We observe a promising signal for copper: the price marked the record daily high over eighteen months. However, we still consider the movement to be a rebound. Monetary stimulus is supposed to promote a long-term economic surge. Only this can send the sustained downtrend back to the green zone.
Featured Post by IFC Markets analysts: Dmitry Lukashov, Sergey Kamenshchikov
