Copper Slumps on China’s Slowdown, Eyes on EU Meeting

By Shihoko Goto -Exclusive to Copper Investing News

Rekindled worries about stalling growth prospects are putting a damper on commodities across the board this week including copper. In fact, the red metal hit a three month low amid concerns about a slowdown in China’s growth prospects and Europe’s inability to scramble out of its quagmire.

Thursday, copper for December delivery ended 6 percent lower, down 20.05 cents to $3.057 a pound.

Bearish macroeconomic news put a damper on the bulls, not least due to continued worries about the debt situation in the Eurozone. The fact that Moody’s downgraded Spain’s credit rating yet again didn’t help matters, marking the third time that the county’s ratings have been cut by the agency since June 2010. The country has the highest unemployment rate among the 27 nations that make up the European Union.

Investors are keeping a close eye on ongoing negotiations between France and Germany to reach an agreement at the upcoming summit meeting this weekend about just how much money should be put in the European Financial Stability Facility. While the sum is currently set at 440 billion euros, speculation is growing that the figure could balloon to 2 trillion euros, which would significantly increase the effectiveness of financial intervention. That in turn could be enough to reignite global confidence in the financial future of Europe and lead to a rise in demand for industrial materials including copper.

Perhaps more worrisome to copper investors though was news this week that China’s third quarter GDP rose at its slowest pace since 2009. With China’s once red-hot economy now seemingly sputtering and signs of robust growth being few and far between worldwide,  industrial production is seen to be facing challenges, and demand for copper is projected to fall by many as a result.

Meanwhile, the U.S. Commodities Futures Trading Commission’s moves earlier this week to limit speculation in the commodities market by increasing position limits has pushed copper investors to liquidate their positions.

On the supply side, there may be a decrease in copper output as industry behemoth Freeport-McMoRan Copper & Gold  (NYSE:FCX) contemplates shutting down its Indonesian mine amid security concerns as miners remain on strike. The Grasberg mine is the second-largest copper mine in the world, and workers have been on strike for over two months as they rally for significant wage increases and better working conditions. In the meantime, roads to the mine have been blocked, concerns about a pipeline sabotage are rising. Freeport-McMoRan stated that it may consider a controlled shutdown of a mine with assets estimated between $2 billion and $3 billion. Citigroup’s head of metals research David Thurtell told Thomson Reuters that “if the strike and mine closure is ongoing, this will underpin the price at the $7,000 a ton mark almost irrespective of the euro zone sovereign debt situation.”

For now, the company reported that it has been operating at two-thirds capacity since the strikes. In a conference call Wednesday about its third quarter earnings, Freeport-McMoRan lowered its full-year copper sales forecast to 3.8 billion pounds, down 100 million pounds from its earlier estimate, as a direct result of the Indonesian strikes.

Meanwhile, in Zambia, President Michael Sata has stopped metal exports, at least temporarily, less than two weeks after taking office. Having been elected to power in part upon his promise to ensure that more citizens benefit from the revenue that copper in particular brings to the nation, the government is considering raising mining taxes, especially on foreign investors. Still, investors expect the government to work closely with private investors before it takes any drastic steps in raising taxes, and there is little concern about the possibility of nationalization of assets. According to Bloomberg News, an analyst at Wood Mackenzie’s metals research unit, Brook Hunt, Sophie Chung said that companies such as Vedanta Resources (LSE:VED) and Glencore International  (LSE:GLEN) and Vale (NYSE:VALE), may invest more than $6 billion in the country through 2013.

Disclosure: I, Shihoko Goto, have no interest in the companies mentioned in this article.