Copper Prices Hit Six-Year Low

As copper logged its lowest prices in six years on the London Metal Exchange (LME) in mid-November, differences in opinions exist amongst metal market observers on the future direction of the market. Some analysts say the decline could last for several more years, while others already see signs of a floor in copper pricing and evidence that prices for the red metal could begin to rally.

A Bloomberg Business report said earlier this week that November prices for copper on the London Metals Exchange (LME) were off 27% year-to-date and down $500 in from October to $4,600 per ton. At press-time, spot prices for copper were $2.11 per pound on www.kitco.com, down roughly $1 per pound year-over-year.

While the forecasts for future copper pricing are all over the place, analysts speak with one voice when discussing the reasons behind the breathtaking decline in copper pricing over the past year. All point to a decrease in demand for copper from China, which accounts for 40% of total global demand. Over the past decade, China has been buying up copper in global markets to feed the massive build-out of housing and public infrastructure as it transitions to a more urban country.

While the signs of this construction surge have been quite evident to any visitor to China over the past few years, the other key driver in its demand for copper — its use as collateral for financial loans on an unprecedented scale and the related stockpiling of the red metal in warehouses — is much tougher to quantify. Data on exactly how much copper sits in Chinese warehouses in Shanghai as collateral for loans is quite sketchy. Some copper industry analysts say this financial practice won’t be as big of a factor in Chinese demand for the red metal down the road.

According to a Nov. 17 post by Bloomberg Business, Goldman Sachs is quite bearish on future copper prices and believes, “Only a significant rise in Chinese consumption will be enough to rescue prices.” Taking the opposite position were executives at a recent metals industry conference in Shanghai who said copper prices are at or near the bottom in the current cycle. The Bloomberg Business post and a report by the International Copper Study Group (ICSG) said by 2016 there will actually be shortage of copper in 2016 that the ICSG report pegged at 130,000 tons.

A recent report on www.theedgemarkets.com presented cases for both further declines and a bull market rally in copper pricing. It said prices could decline if the U.S. Federal Reserve tightens monetary policy in December and the dollar strengthens further, but noted that some analysts say investors are starting to buy up copper assets and production.

“We are already seeing the start of the next bull market in commodities,” said chief investment officer Jonathan Barratt of Ayers Alliance in Sydney in the report on www.theedgemarkets.com. “The hot money is now moving into the mining sector and areas that represent good value. Just the M&A activity in the sector suggests that smart people are starting to see value there.”

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