Copper and the End of the Seasonal Lull

By Leia Toovey- Exclusive to Copper Investing News

With the end of the seasonal lull for copper just around the corner, traders are uncertain what direction prices will move come September, when demand typically rebounds. Copper demand tends to cool off in the July to September period, but traders are concerned that this season’s lull may be more pronounced as the economy suffers through a deepening  global economic crisis. At this point, there is inconclusive data, with evidence suggesting that copper prices could move in either direction when consumers embark upon their fall restocking programs.

Copper prices

Copper prices hit record highs last February, but have since retreated on the back of financial uncertainty in both the Eurozone and America. This economic uncertainty has coincided with copper’s seasonal low-demand period, however, prices have held up relatively well. Last week, Benchmark copper on the Shanghai Futures Exchange closed at its highest in over three months, as market sentiment improved in anticipation of a seasonal post-summer consumption boom. Copper staged this mini-rally despite the fact that copper order volumes continued to disappoint. Last week, cancelled warrants (orders to remove copper from stockpiles) monitored by the London Metal Exchange dropped for a 13th straight session and touched a four-month low. The downtrend in cancelled warrants had little influence on prices, as they were directly attributed to the typical summer lull, and not an overall weakness in the copper market.

Copper has held up remarkably well this summer, despite souring sentiment over the state of the global economic recovery. “Given all sorts of factors; the downgrading of the US credit rating, the problems in the Eurozone, you would have thought copper would be 20 to 30 percent lower. It’s been an impressive performance,” according to Credit Agricole analyst Robin Bhar.

Analysts keep an eye on China

With economic troubles still steadfast in Europe and America, the market is keeping a close watch on top-consumer, China. It is possible for the red metal to stage another rally, if the country increases its imports, which is why analysts are very closely monitoring all data that could provide import insight into fall import numbers. Copper output in China declined in both July and August as some smelters suspended production for maintenance during the summer lull in demand.

In the meantime, there is only speculation regarding the country’s current stockpiles. Given the decline in manufacturing, chances are that stockpiles have rebounded, however, China has not disclosed this data, leaving traders and analysts to speculate. Currently, analysts have a very broad inaccurate estimate- claiming that stockpiles may have increased somewhere in the 100,000 to 400,000 tonne range.

The precise amount of metal that China has stored will be a significant factor in determining fall copper import volumes, and therefore prices. With China accounting for 40 percent of world copper demand, traders have stated that the markets will have to wait until September before they can get an idea of how demand from China will be able to absorb the rising supplies. An optimistic point to consider is the fact that in June, when the seasonal lull was just starting, stockpiles in China were at a year-low of 300,000 tonnes.

China’s  demand growth for copper rose 2 percent in the first half of this year compared with the same time last year. While there is evidence that the pace of economic growth in the world’s second-largest economy is cooling, manufacturing is booming. Exports hit record levels in July as factory output grew 14 percent from a year ago. China’s imports of refined copper rose almost 9 percent to a six-month high last month as factories took advantage of lower prices and the country embarks on building millions of homes. An arbitrage opportunity for copper just opened this month, and traders expect that come September, this window of opportunity may spur more copper imports.

Expectations for copper

Despite the economic turmoil, copper prices will continue to be supported by the fact that the global copper market is expected to be in a deficit this year. Analysts have trimmed their predictions of deficit volumes as the global economy has stuttered, however, a deficit still remains with analysts forecasting a 343,150 tonne deficit last month, compared to the previous forecast of a 444,000 tonnes deficit forecast in January.