Copper Price Could Follow Iron Ore over a Cliff

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The price of copper has been swinging wildly since hitting a near four-year low in March.

This week is no exception and the red metal is down 3% in since Tuesday erasing most of the gains from a surge in the price last week.

In midday New York trade on Thursday, December copper fell more than 1.5% to a low of $3.1425 a pound without any fresh news that can be blamed fro the sharp pullback.

Weak economic news out of China, consumer of 45% of the globe's copper, is the number one factor for the weakness in the price.

Manufacturing activity in the world's second largest economy slowed sharply in August and is nearing contractionary levels, a reading of the country's services industry dropped to nine-year lows in July while bank lending is at financial crisis levels.

Probably most worrying is weakness in China's property sector – construction accounts for 60% of copper demand.

Latest monthly data show home sales declining by almost a fifth, the sharpest downturn since December 2008. At the same time unsold inventories of real estate in China have risen by more than 25% this year.

The outlook is bleaker still and some economists are predicting a property bust after years of overbuilding that will make the US subprime mortgage crisis seem puny.

The FT reports that total floor space under construction is "enough to satisfy well over four years of demand at a national level," while in some of the worst affected provinces, "there is enough supply for more than seven years of demand."

Outside China the demand picture is not that bright either. Accelerating growth in the US, the world's second largest consumer of the metal has been offset by continuing soft demand from two other major importing countries Germany and Japan.

While demand factors are putting the copper price under pressure, supply is adding to concerns for the rest of this year and 2015.

Mine production is ramping up again and is forecast to grow 5% this year and more than 7% in 2015, notably in Peru which has a number of large mines becoming operational or expanding capacity.

Freeport McMoran (NYSE:FCX), Indonesia’s largest copper concentrate producer, is resuming exports for the first time this year while Newmont Mining (NYSE:NEM) could also soon restart shipments from the country following a dispute over concentrate duties.

While still up sharply year on year China's imports of refined copper fell to to 340,000 tonnes in July, the third straight month of declines. For the rest of the year imports are expected to decline sharply as some 450,000 tonnes of additional refined output in China come on stream.

One positive factor for the copper market this year is the fall in global inventories.

Global refined warehouse stocks are at their lowest level since early 2012, while exchange inventory is at the lowest level since 2008.

However, since the Qingdao scandal where several companies pledged the same copper and iron ore held at the port as collateral for loans to different banks, the spectre of vast quantities of "off-balance sheet" copper hitting the market has muted the impact the drawdowns would otherwise have had.

The price of copper could well follow the trend in the iron ore price where a combination of slowing demand, swelling supply and similar exposure to China have seen the price collapse by more than a third this year.

This chart by Capital Economics illustrates why the independent research house argues that "if the relationship between copper and iron ore prices is to be restored, it is likely to take the form of a renewed fall in copper prices:"

CHART: Copper price poised to follow iron ore over a cliff

Prices for iron ore tumbled again Friday for the 10th day in a row, hitting levels close to those seen last in October 2009.

The decline is the longest run of daily losses in two years and oversupply as well as China’s unseen signs of recovery are to blame.

Benchmark Australian ore, with a 62% iron content, dropped 0.1% to $87.62 a tonne, according to Metal Bulletin, bringing the monthly loss to 8.4% and the yearly one to over 35%.

Figures provided by The Steel Index, however, contradict the above numbers. Spot price for the import of iron ore into China was, according to TSI, up 0.7% to $87.9 a tonne on Friday.

Barclays Bank estimates that, assuming Chinese steel production grows at 5.1% per year, there will be a surplus of 79 million tonnes of seaborne iron ore this year and 67 million tonnes next year. UBS estimates a surplus of 74 million tonnes this year, with a possible oversupply of 267 million tonnes by 2016.

Source: mining.com