Metals change course

August 20, 2015 09:30 AM

Copper and China

Copper is a bellwether for economic growth. It is affected by automobile and home sales and economic stimulation in the United States, the Far East and in Europe. The average house has 400 pounds of copper and the average car has 40 pounds, so home and auto sales are very important to copper traders. Copper traders often look to China as a guide to where copper is headed.

What’s going on in China is having even an even greater effect on copper than gold right now, according to Gero. 

China has implemented fiscal stimulus and there is some expectation that the People’s Bank of China may ease monetary policy further near-term to achieve stronger corporate banking lending and its gross domestic product growth target for this year. 

China’s national reform and development commission has set its GDP growth target for this year at 7%. Last year they set it to 7.5% and it actually grew 7.4%. China has a peculiar way of nearly always hitting its targets, so the point is that they are anticipating sluggish growth. Growth is slower than it was, which is to be expected, because for about five years it had near double-digit growth. Its potential to grow is gradually slowing over time, which is just a natural development (see “Emerged,” below). 

“We had some economic indicators for China in January and February that weren’t particularly robust...” Mohr says. “...with the industrial activity decelerating in China to only 6.8% year-over-year when a year ago it was growing at about 10%. I expect China’s industrial activity will pick up a little in the first quarter, but definitely as we move into the second quarter because China has a seasonal pattern.”

Concerns about growth prospects in China have less to do with its GDP growth target, and more to do with the idea that China will be growing at a slower pace. But it’s important to note that doesn’t mean that raw material demand is declining, it’s still moving at a solid pace, particularly in copper (see “Copper leads,” below). It’s the pace of increase that’s slowing and therefore the demand in raw materials also will slow.

“This makes the metals and financial markets in London and New York a little nervous because China is responsible for about 47% of world consumption in the four key base metals, while the United States is responsible for less than 9%,” Mohr says.

The sentiment for base metals as a group is going to be a little on the soft side, according to Mohr. “But although the base metals are currently on the weak side, they are due for another bull run later this decade.” 

She adds, “Base metals prices have actually inched down this year because unlike previous years, we’ve started this year with very poor sentiment on the outlook for global economic growth. This is unusual because usually at the beginning of every year financial markets become optimistic about the outlook for global growth accelerating, and then in the fall GDP forecasts have been marked down; that’s one of the reasons we typically get a correction in equities markets in September.”

However, she adds that this year things have been quite different. Financial markets actually have had soft expectations for global GDP growth and that has impacted price.

Mining factor

Recently gold production slowed down because of cost when crude oil and diesel prices went up because it became more expensive to run the equipment to mine. Then the cost of mining came down substantially and gold crashed from $1,900 to $1,150. It took the market a while to adjust. 

“Of course, gold prices will continue to be driven by demand, but mining will be able to keep up and meet demand as far as I can tell,” Thomas says. “What is going to be the driving factor for the next five years is how much demand is going to come out of China, Singapore and India.”

Mohr agrees, “China probably has an even greater gold market than India. China is a huge gold miner. A lot of gold miners have deferred production of gold, and gold prices may lag until mining ramps back up.”

It should be noted that miners in Canada are benefitting from double-digit currency depreciation and low diesel costs, offsetting much of this year’s weaker prices for both gold and base metals, according to Mohr.

Platinum and palladium’s turn

Many traders don’t know that platinum is used for cracking crude oil into heating oil and gasoline by the oil industry, says Gero. 

“So it’s not just jewelry sales and automobile production that have helped platinum. Also, Russian sanctions have led the oil industry to stockpile platinum. So the price difference between platinum and gold is starting to narrow,” Gero says. 

He says copper and platinum will see higher prices this quarter—around $2.70 to $3.00 for copper and $1,175 to $1,200 for platinum.

“A lot of people are writing off platinum because they’re saying they’re going to find another metal that will have the same reactive properties, but I don’t see anybody changing the periodic table anytime soon,” says Thomas. 

He said that just recently, the South African government announced they need 1,000 metric tons of platinum for its electrical program and platinum rebounded.

He says platinum and palladium will experience increased demand this year and they are worth following. 

Mohr is optimistic on the outlook for zinc, which is her favorite base metal for investors. She expects zinc to perform much better than copper because of current zinc mine depletion. “While zinc may be soft now, prices will start to move higher and it will perform relatively well in the next two to three years,” she says.  

As always, the price performance of the metals is going to depend greatly on interest rates, the price of crude, the price of currencies and the behavior of interest rates. But metals traders also should keep an eye on China and Iran this year to see how they move the markets.

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About the Author

Yesenia Duran is Managing Editor at Futures magazine. She has covered the financial industry for more than 5 years. She originally joined Futures in 2002 after graduating from Northwestern University where she majored in journalism. In her free time Yesenia trains and prepares for the eventual zombie apocalypse. E-mail her at yduran@futuresmag.com, and follow her on Twitter at @yesifutures.