Economic Worries Negatively Impact Copper
Rising inflation and interest rate hikes in China, a struggling Japanese economy, and sustained high oil prices have investors worried about future demand for copper.
By Michael Montgomery—Exclusive to Copper Investing Newsgold and oil prices. The main factor seems to be inflationary fears coming from China and a battered Japanese economy, which are viewed as demand negative for the red metal.
Also, there is a growing consensus that stockpiles of copper in China are in a massive surplus and may be dumped onto the market. Continuing high oil prices have made some analysts fearful of a slowing global economy affecting demand. Brent Crude ended the day slightly lower, yet still remains over the $122 mark. Many commodities also suffered when Goldman Sachs recommended selling a basket of commodities, including copper, because of oil demand destruction, implying that the commodities bull run may be coming to an end.
Inflation in China for March accelerated to as fast as 5.4 percent, a 32-month high. However, China’s economy grew at by an amazing 9.5 percent. “With inflation expectations well-above the 4 percent target there is the likelihood of an additional round of Chinese tightening. If their demand continues to wane, these copper prices are certainly overdone,” stated David Meger, VP of Metals Trading for Vision Financial Markets.
Furthering worries about Chinese demand and a surplus of copper, stocks of copper in LME warehouses rose by 875 tonnes, to 450,800 tonnes, the largest stock of the metal since June 2010. In China, surpluses of copper have had analysts worried for some time now. The Shanghai Futures Exchange hearing the call for transparency has opened two warehouses, which has revealed large stockpiles of the metal bought by speculative investors.
“The inclusion of these previously unreported stockpiles into the SHFE network shed light on why China has pulled back from copper markets. China’s refined-copper imports fell 28% in February from a year earlier, to just 158,185 metric tons. March copper imports were down 33%,” reported Tatyana Shumsky, for The Wall Street Journal.
Worldwide, manufactures may be seeking copper alternatives due to high copper prices. Chris Burns, North American engineering director with US automotive parts supplier Delphi, explains that “with copper being at historic levels, there has been global interest in going to aluminum cables in cars.” Aluminum-giant Alcoa, estimated that if copper prices remain high, aluminum could be substituted for 20 percent of the 19 million metric tonne copper market. While the price of copper remains high, excess inventories and decreased demand may lower the price enough to mitigate substitutions to copper.