Copper Zooms To 3-Year High: Will The Momentum Last?
Zacks Investment Research | Sep 06, 2017 10:28PM ET
Copper is on a tear, hitting fresh three-year highs thanks to encouraging economic numbers out of China — the world’s biggest consumer of the metal. Renewed optimism about the Chinese economy has given the red metal a fresh shot in the arm.
‘“Dr. Copper” on Fire
Prices of copper for December delivery touched roughly $3.18 per pound on the New York Mercantile Exchange on Tuesday, a level not seen since September 2014. Copper prices on the London Metal Exchange (LME) also hit a three-year high on Tuesday, clocking $6,970 per ton, according to Reuters.
The widely used industrial metal, nicknamed Dr. Copper for being a reliable barometer to track the health of the world economy, gained from encouraging economic data from China. This raised expectations of higher demand for the commodity.
China's official manufacturing Purchasing Managers' Index (PMI) for August came in at 51.7, up from 51.4 in July and also exceeded expectations. A reading above 50 indicates growth. The better-than-expected August reading came on the heels of strong production and a rise in new orders.
Moreover, China Caixin/Markit services PMI rose to 52.7 in August from 51.5 in July on a pickup in new business orders. These data suggest that the world's second largest economy is in good health notwithstanding a cooling property market and high debt levels.
China maintained the momentum of steady and sound development in first-half 2017, laying a strong foundation for achieving the government’s GDP growth target of 6.5% for this year.
China holds the largest share by far of global copper consumption (roughly 46%), and has a significant share in the total production of pure copper. Trends in Chinese GDP growth and world trade have a significant influence on copper prices. There is a strong correlation of the metal with ups and downs in the Chinese economy. As such, positive economic data are likely to step up the nation’s demand for the red metal.
Another factor that contributed to copper’s rally is a sharp drop in output from Codelco — the world’s biggest copper producer. On Sep 5, the Chilean state copper company said that production for first-half 2017 from its copper operations fell to 798,000 tons from 843,000 tons a year ago.
Copper prices were also supported by a weak U.S. dollar. A weaker greenback makes dollar-priced metals cheaper for holders of other currencies.
The Red Metal’s Rebound
Copper, an important barometer for the global economy, is a major industrial metal that plays a significant role in emerging countries. Trends in the copper market are often a useful indicator of the state of the global economy given the metal’s diverse applications. Developments in the world economy have a strong correlation with movements in copper prices.
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After vastly underperforming other metals, copper witnessed a sudden spike at the end of 2016. A pick up in global manufacturing activity and hopes of Trump's infrastructure spending drove the red metal’s recovery. Optimism around the Chinese economy and indications of tighter global mine supply aided prices.
Moreover, supply disruptions at some of the key copper mines including BHP Billiton’s Escondida mine (the world's biggest copper mine) in Chile earlier this year and a strike at Freeport-McMoRan’s Grasberg operations in Indonesia led to a decline in mined copper production and provided a thrust to prices.
Copper received further boost in July on reports of a potential Chinese ban on certain imports of copper scrap by the end of 2018 as part of the country’s move to reduce waste. This would lead to higher demand for refined copper and copper concentrate. While China’s imports of copper scrap increased this year, the country’s demand for refined copper remains depressed. As such, a ban on scrap would result in increased imports of refined copper.
Moreover, investors are betting on copper as the metal is expected to significantly gain from the booming market for electric vehicles that use a substantial amount of copper in their batteries.
Copper prices are up around 24% so far in 2017 and the metal is trading roughly 50% higher than last year. The non-ferrous metal is among the best performing commodities this year.
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