The bull run in copper prices has been struggling. Some evidence that the recovery in the US economy has been sputtering has surfaced. Primarily, the most recent non-farm payroll data showed that only 120,000 jobs were created in March – considerably below expectations and the lowest monthly level since October. Copper prices are generally seen as a reliable leading indicator of economic health. So it was somewhat worrisome that after outperforming stocks for most of the period after the 2008 bottom, copper prices topped out vis-à-vis stocks early in 2011.
The impact of any single region is dwarfed by the effect of demand out of China, where usage accounts for roughly 40% of global consumption. Chinese economic data are scrutinized for any indication that commodity imports will suffer. The general consensus is that China has avoided a hard landing. GDP figures released on April 12 showed that the economy grew by 8.1% in the first quarter (annualized), below analysts’ expectations for 8.4% growth. That compares with 8.9% growth recorded in the fourth quarter of 2011 and 9.7% in the first quarter last year.
The HSBC/Markit Flash Manufacturing Purchasing Managers Index for China, released on April 23, rose to 49.1, up from 48.7 in March. Still, it remained below the critical 50 level, which marks the threshold between contraction and expansion in the sector, and indicates strains in China's economy, as exports shrink while domestic demand remains stagnant.
The International Copper Study Group’s (ICSG) most recent data show that 2011 ended with a 358,000-tonne deficit . Consumption/production developments over the past few months have not shown dramatic changes, so the global balance sheet is probably still in deficit.
Figures released on April 10 show that Chinese month-over-month imports for March were down 4.65%. However, as we can see in Chart 2, it’s hard to view the overall picture as terribly bearish. February imports were the second highest on record, and even January – the weakest month for imports so far this year – was substantially above year-over-year levels.
On the supply side, Chilean production is as much a swing factor for the global market as is consumption in China. Early forecasts for 2012 are calling for a jump in output of between 6% and 10%. But we’ve heard that before. A year ago, estimates for Chilean production were in the neighborhood of a 3% increase. Instead, we saw a decline of 3.2%. Early results for this year do not support the predicted surge in output, with January down 7.6%, year-over-year, and February up 6.5%. Weather problems were a significant factor and, naturally, are always a wild card. However, the other two issues, labor unrest and declining ore grades, continue to be obstacles.
Shanghai warehouse stocks have more than doubled since the beginning of the year. However, when inventories are viewed in global terms, they actually have been declining. Chart 3 shows that the combination of LME, COMEX, and Shanghai warehouse stocks have been falling. As always, warehouse stocks remain an inconclusive indicator.
The other base metals traded on the LME, including aluminum, nickel, zinc, and tin – with the exception of lead – have also been sinking to multi-month lows, providing some confirmation that the contributing factors of a questionable recovery in the US and the faltering economies in Europe are affecting demand for industrial commodities.
On March 7 our recommendation to raise the stop on our long position to $3.65 per pound, basis May, was triggered. Although there is no clarity regarding the two principal fundamental issues that drive this market – Chinese usage and Chilean output – the tape seems to be telling us that this market could be headed lower. A foray back into the price range in which copper has spent most of 2012, however, would make us nervous shorts. Sell short July copper, but use a rather conservative stop of $3.75 per pound, close only.