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Copper Prices Are No Longer Ailing

4 March 2015 in Trading Ideas

After a rough 2014 that extended into the first few weeks of this year, commodities appear to be fighting back.

Many investors are familiar with the headline-grabbing price of crude oil, which plunged below $45 a barrel in late January, but has since stabilized around $50.

The same goes for copper, which, after a months-long downturn, recently rallied to seven-week highs. That move also has provided a lift for copper-related investments. The Dr. Copper motif, for example, has increased 2.8% in the past month.

In that same time, the S&P 500 has risen 4.8%.

Over the past 12 months, the motif has fallen 19.0%; the S&P is up 16.9%.

What’s gone right for copper seems to be a perceived reversal in the uncertainty surrounding the metal’s two biggest customers – China and Europe.

Just weeks ago, copper prices marched significantly higher as the situation around the Greek debt negotiations took a more positive direction. As the Wall Street Journal pointed out, the possibility of an agreement that would keep the European Union whole sparked optimism that was solidified when a broad outline of a deal was reached.1

Meanwhile, fears of an economic downturn in China, the No. 1 consumer of copper, had weighed on the metal’s price for months.

In early February, however, China cut its bank reserve requirement ratio in a bid to stimulate lending and boost economic growth, a move that analysts believe may eventually have a positive effect on copper demand, the Journal said. Some investors expect China, which consumes 40% of the world’s copper, to follow through with more stimulus measures, including allowing the yuan to weaken against other currencies, it added.

Further support for a China-bull take on copper prices followed last week when data released on Wednesday showed that the preliminary reading of the country’s HSBC manufacturing index rose to 50.1 in February, just above the 50.0-point level that separates growth from a contraction on a monthly basis.2

According to Investing.com, copper traders consider shifts in the HSBC PMI an indicator of China’s copper demand, as the industrial metal is widely used by the sector.

At the same time, analysts have been taking down their estimates for how large a supply glut copper markets will see this year, after BHP Billiton said last week that its Olympic Dam may see a production shortfall of as much as 70,000 metric tons of copper due to an electrical failure.

“The market is moving into more balanced territory, and we’re seeing a delayed reaction to that in the price,” Mike Dragosits, an analyst at TD Securities, told the Journal.

Copper’s bounce higher hasn’t surprised everyone. It’s worth noting that Morgan Stanley analysts in late January were calling for the metal’s price to rise 24% by the end of the year, according to a Bloomberg article.3

The analysts said flatly that there was “no evidence” of a collapse in copper demand, pointing out that cheaper energy prices had dragged down metal prices by reducing the cost of production, prompting mining companies to undercut each other on price.

Ultimately, however, Morgan Stanley said it expected demand will exceed supply. The bank said the refined copper market will be in a deficit of 70,000 to 110,000 tons from 2015 to 2017.

That lack of supply could mean the demand for copper is just beginning, and investors may begin taking notice,

1Ira Iosebashvili, “Copper Is Shining Bright After Dull Start to the Year,” wsj.com, Feb. 18, 2015.

2“Copper futures rally to 6-week high as China returns to the market,” investing.com, Feb. 26, 2015, http://www.nasdaq.com/article/copper-futures-rally-to-6-week-high-as-china-returns-to-the-market-cm448690, (accessed March 2, 2015).

3Laura Clarke, “Morgan Stanley Sees 24% Rally in Copper After Last Week’s Slump,” Bloomberg.com, Jan. 19, 2015, http://www.bloomberg.com/news/articles/2015-01-19/morgan-stanley-sees-24-rally-in-copper-after-last-week-s-slump, (accessed March 2, 2015).

Tags: Dr. Copper