Copper Range-Bound as US Growth, China Risks Assessed

Copper investors this week are taking a wait-and-see approach, on the one hand buoyed by yet more positive US economic data and expectations that the Fed will continue its easy monetary policy, but anxious about a steady fall in China’s copper demand on the other.

US GDP in the fourth quarter of 2011 increased at an annual rate of three percent, its biggest gain in over a year according to the US Department of Commerce. The number of people seeking unemployment benefits fell to the lowest level since April 2008, down 5,000 to 359,000 in the latest week, the US Department of Labor reported.

Earlier in the week, Federal Reserve Chairman Ben Bernanke said in an interview with ABC News that the US has not “quite yet got to the point where we can be completely confident that we’re on a track to full recovery,” adding that “I think it’s really important not to be complacent. We have a long way to go, a lot of work to do, and we’re going to keep doing that.”

On Wednesday, the Federal Reserve Bank of New York released a report by economist Aysegul Sahin which found that the US unemployment rate could drop as low as six percent by the first half of 2013.

Still, US growth is not without risks. The Department of Commerce reported that corporate profits rose at the slowest pace in three years in the latest quarter, which many analysts worry will lead to a slowdown in hiring.

In afternoon trading Thursday, COMEX copper for May delivery was flat at $3.79 a pound.

Looking ahead, Goldman Sachs (NYSE:GS) shifted its commodity recommendations for the second quarter to neutral from overweight based on expectations that the global economy will soften in coming weeks. For the twelve-month period it is keeping its overweight recommendation. The investment bank pointed to China and instability in the Middle East as the two biggest risks for the commodities market, and stated that “we have long argued that the level of demand is far more important in commodities than the change in demand, which suggests it will not take much for China to surprise to the upside as the new round of stimulus takes effect.”

Company news

China, however, has been showing signs of sluggish growth, with Société Générale strategists Guy Stear and Anthony Lee stating in a research note to clients that earnings estimates for Hong Kong-listed Chinese companies are currently “far too optimistic.”

Shares in Chinese copper giant Jiangxi Copper (HKEX:0358,OTC Pink:JIXAY) fell as the company reported that net income for the second half of 2011 fell to 2.27 billion yuan from 2.79 billion yuan during the same period a year ago, considerably lower than what analysts had expected. The company also said its mining projects in Peru and Afghanistan will be delayed due to political and legal concerns. Jiangxi does expect to start production between 2014 and 2016.

As for Glencore International’s (LSE:GLEN,OTC Pink:GLCNF) $34 billion bid for Xstrata (LSE:XTA,OTC Pink:XSRAY) to create the world’s third-largest copper producer, the deal may face legal issues amid concerns that the merged company will dominate the zinc market, according to investment group Jefferies. Analyst Christopher LaFemina said that Xstrata may be forced to sell its Spanish San Juan de Nieva zinc smelter to gain approval from the European Commission.

Japanese trading group Mitsubishi Corp. (TSE:8058) will pay $95 million for a 25 percent stake in Montana-based Stillwater Mining’s (TSX:SWC.U,NYSE:SWC) proposed copper and platinum mine near Marathon, Ontario. The development cost of the open-pit mine is expected to reach between $550 and $650 million. The mine is slated to initially produce about 37 million pounds of copper per year.

Junior company news

Vancouver-based Redhawk Resources (OTCQX:RHWKF,TSX:RDK) announced the framework for a pre-feasibility study at its wholly-owned Copper Creek, Arizona project that is to be led by KD Engineering of Tucson, Arizona. An updated resource estimate report is expected to be completed by Independent Mining Consultants by April 2012, and will be the basis for mine planning in the pre-feasibility study. Due to the lower economic cutoff grades for open pit mining and a much larger bulk underground mining method, the updated resource report will provide a separate resource estimate for the underground and open pit mining approaches.

Kelowna-based Tiex (TSXV:TIX,OTC Pink:TTEXF) said its next program will have the technical ability to support a thesis of potential new discovery in its copper porphyry targets. The company expects to devote the majority of its 2012 exploration budget to six targets. In order to reach its 2012 exploration goals, Tiex is considering a number of options, including partnering with a vested strategic partner to share expenses pro-rata, joint venturing some of the targets, or a combination of the two.

Securities Disclosure: I, Shihoko Goto, hold no direct investment interest in any company mentioned in this article.