Copper Shrugs Off Europe Downgrades with Eyes on China

By Shihoko Goto – Exclusive to Copper Investing News

After an initial knee-jerk reaction to sell on Standard & Poor’s decision to downgrade the ratings of nine Eurozone countries last Friday, commodities traders appear subsequently to have taken the credit rating agency’s pronouncements in stride. What’s more, many investors expect the commodities markets to be resilient enough to any further European government bond downgrades by agencies they expect emerging economies to be the driving force to determine base metal demand.

Prior to January 13, there had been much speculation that S&P would downgrade a number of European countries, so Friday’s announcement caught few completely off-guard. Still, the fact that both France and Austria lost their AAA rating by one level to AA plus, while Italy, Portugal, Spain and Cyprus were cut back by two steps and Malta, Slovakia and Slovenia were downgraded by one level increasing selling pressure on global markets. The price of copper, for instance, fell nearly 1 percent following the news.

Still, the fact that copper has gained over 2 percent even after S&P cut its rating of the European Financial Stability Facility from AAA to AA plus on Monday January 16 speaks volumes about how market players have already factored in the persisting economic weakness across Europe, according to some investors. Instead, they are focused more on how developing countries will continue to drive up demand for commodities, especially China.

“Europe could implode… but that (scenario) has been discarded,” said Michael Cohn, founder and chief investment strategist at New York-based Global Arena Investment Management. He added that while the global economy could face a “Lehman moment number two” that would depress growth worldwide, that appears to be unlikely for now, and the odds are that demand for raw materials in particular will be driven by China and other emerging markets, and there is “very little that would derail that” over the next decade.

Certainly, market eyes are on Beijing’s next moves as commodities across the board are gaining ground on hopes that the government will lower interest rates in order to stimulate the economy. Tuesday, China’s National Bureau of Statistics reported that the country’s economy grew at its slowest pace in over two years in 2011 as exports fell, the real estate market took a hard hit, and banks tightened credit. Speculation is therefore rising that the central bank could ease monetary policy as a means to jump-start the economy. That, in turn, would encourage greater industrial output and demand for copper as well as other materials in a country that accounts for about 40 percent of the world’s total consumption of the red metal.

In fact, mining shares including Freeport-McMoRan (NYSE:FCX) and Southern Copper (NYSE:SCCO) are gaining ground even as European leaders continue to downplay the significance of S&P’s downgrades. Moreover, S&P’s rivals Moody’s and Fitch have both kept their top rating for France, giving greater confidence to investors that Europe’s financial woes can be overcome in the longer-term, even though the continent is likely to continue being mired with debt issues for the foreseeable future.

“Copper is going to stay relatively stable,” Cohn said, especially as China will need to keep its economy growing at a steady clip of around 8 percent in order to ensure economic security. Beijing simply “can’t afford to stop that trajectory.”

Junior copper mining groups could therefore be heartened that any continued downturn in Europe’s growth is likely to be offset by China’s continued expansion.

I, Shihoko Goto, have no interests in the companies mentioned in this article.