When a market is no longer increasing on good news, this is usually a sign of a turnaround. This is the case for copper. In addition, the market doubts whether the fundamentals justify a price of about 8,000$/t. On the last Friday, in the course of the afternoon also the chart-technical situation has changed. Furthermore, also other industrial metals could be drawn down in line with copper.
In China, the largest consumer of copper, GDP in the first quarter of 2010 increased by 11.9%. Although the central bank had taken restrictive measures in January, GDP growth accelerated further. We had noted previously in this blog that increases in minimum reserve requirements and the restriction of credit would only slow down the pace of growth, but the increase in the demand for copper should continue. The message of China's GDP growth would actually be positive for the copper market. But copper has not been able to cross above the threshold of 8,000$/t significantly. In the market, the growth rate has once again raised worries that the copper demand could decline.
A further increase was prevented also by worries that China is deliberately taking measures to cool the property market and to avoid a bubble. This policy is under medium-term aspects positive for the copper market, as it tries to avoid, other than the monetary policy of the Fed, a collapse in demand and achieve a more even level of construction activity in line with demand. It does not mean that the central bank, the Peoples Bank of China, would bring about a slump in construction. However, the short-term demand for copper should be expected to be lower than it would be the case if construction activity would be unbridled.
With the crisis in financial markets in the year 2008, China has fixed the exchange rate of the yuan against the US dollar and now considers a return to a managed floating. This, too, has had a negative effect on the copper price on Friday. The market fears that a revaluation of the yuan, which is to be expected with a controlled floating, although the prices of copper in yuan would cheapen, but China's exports were likely to suffer from a stronger yuan. We consider this argument is not convincing enough. It would only be negative, if China would export all the copper imports after further processing, ie, exports alone would determine the amount of copper imports. With a yuan appreciation copper is also cheaper for domestic consumption and this may be the overall determining factor.
Only on Friday afternoon, copper came but under strong selling pressure. However, the trigger for this has not the least to do with the fundamentals for copper. The news that the U.S. Securities and Exchange Commission brought a fraud action against Goldman Sachs and an employee in connection with the issuance of a CDO in 2007, led to a sharp rise in risk aversion of investors, from which the metals markets were affected. Even gold, which is often regarded as a safe haven, came under massive selling pressure. This change in mood of investors is unlikely to reverse overnight. After copper has traded sideways in the last two weeks, it came to an downside breakout on Friday. Copper could therefore drop further.
In our forecasts for copper prices, we have assumed that the price in the current and also the following quarter would correct lower. However, this decline would not be due to a slump in demand from copper consumers. Rather, we expect that the leading indicators, as the OECD leading indicator showed earlier last week, were rising still, but losing momentum. Financial investors are likely to use this as an opportunity to take profits in base metals. In the case this coincides with a growing risk aversion, then a more pronounced correction in copper and other nonferrous metals might be looming and this, despite the LME warehouse stocks of copper could fall further.
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