Minews - Copper tells two stories on global economy

(Minews) - It is often claimed that copper prices are a reliable barometer of the global economy’s health. Those who monitor the metal closely are sharply divided over its condition.

As of Monday, copper’s spot price on the London Metal Exchange had fallen nearly 10% since the start of the year. Even so, the metal has staged a partial recovery from a five-year low reached on Jan. 29, rising 5.1% from that low to $5,672 a ton on Monday.

The whipsawing in prices has been mirrored in the shares of major copper producers. Chile-based Antofagasta PLC’s stock fell 13% in January but has since recovered the lost ground. As of Friday, U.S. copper miner Freeport-McMoRan Inc. was down 8.9% since the end of last year, while Switzerland-based Glencore PLC, a big copper miner and trader, was off 2.2%, having hit its lowest point since its 2011 flotation in late January.

Copper’s gyrations have left analysts unusually polarized over where its price will go next.

Some blame speculators—a class of investor often pointed to when commodity prices start swinging sharply—for the price slump this year. They suggest copper will recover further now that the Lunar New Year holiday in Asia has ended. Demand tends to pick up when Asian buyers return to work. Others think growing copper production world-wide and weaker consumption will keep prices under pressure this year.

“There is much debate about how much of the recent copper move lower has been fundamental,” Goldman Sachs analysts said in a recent note. “We are strongly in the camp that it is fundamental, driven by sluggish demand growth, above-trend refined supply growth, and cost deflation.”

For Goldman, a key sign that copper’s weakness is justified is the rising levels of inventories of the refined metal in Chile, the world’s largest copper producer. Copper stocks there rose by as much as 170,000 tons in the second half of 2014 to their highest level in more than a decade, apart from a brief period in 2013, Goldman estimates. Factoring in stocks held elsewhere in the world, that implies copper output is running around 500,000 tons above demand on an annualized basis, the bank says. That is equivalent to around 2% of annual refined copper production.

Goldman isn’t alone in forecasting an excess of copper in 2015. The International Copper Study Group, comprising copper-producing and consuming countries, forecasts that demand for copper will grow this year, but only by 1.1%. Production will rise 4.3%, the group expects, led by output increases in Africa, Asia and North America, leaving a surplus of 393,000 tons by the end of the year, the first positive annual balance since 2009.

Still, forecasts for copper output have been wrong before. In a report, Commerzbank AG noted that Chile’s state copper commission, Cochilco, has said that the country plans to produce six million tons of copper this year, which would amount to a 4.5% increase. The report says, though, that in the past Chile’s production has fallen short of Cochilco’s forecasts.

This year, too, low prices may prompt Chile to produce less, Commerzbank said.

“Copper was oversold compared to its base-metal peers, and that is why it has come back quite quickly,” says Helen Lau, metals analyst with Argonaut Ltd.

She said the metal’s slump last month was triggered by speculative traders who bet that recent precipitous declines in oil prices would weigh on industrial output, cutting into demand for copper.

Copper’s sharpest one-day drop this year, on Jan. 14, occurred mostly during Asian trading hours—a sign, some say, that investors in the region are making large bets when markets are less liquid in the hope of big trading profits. Data from the U.S. Commodity Futures Trading Commission show that bets that copper prices will fall have exceeded those anticipating gains for 21 weeks.

“We regard this pessimism among market participants to be exaggerated and expect prices to recover significantly just as soon as sentiment among speculative financial investors shifts,” Commerzbank said.

Signs are emerging that Chinese demand for copper is inching upward. The premium paid for copper on the Shanghai market over the London Metal Exchange price has risen to about $85 a ton from $75 at the end of January, though it remains far short of the $160 seen around the same time last year.

China’s State Reserve Bureau is expected to start buying copper soon. The bureau, which maintains stocks of metals as strategic materials, tends to look for buying opportunities when prices dip, traders and analysts say. The agency doesn’t disclose its purchases, but it is believed to have stockpiled the metal when prices reached a four-year low last March.