Copper’s Worst Start Since 1988 Showing U.S.-China GapJoe Deaux and Agnieszka de Sousa
Add this year’s decline in copper prices to the mounting evidence of a growing disparity between the U.S. and the rest of the world.
The metal, which former Federal Reserve Board Chairman Alan Greenspan once considered a useful indicator, has plunged 10 percent since December, the worst start to a year since 1988. The selloff is almost all about China. The World Bank this week cut its 2015 growth forecast for the Asian nation, as well as Europe and Japan, and said the global economy will expand slower than forecast, even as the U.S. accelerates.
China accounts for 45 percent of global copper demand, compared with 8 percent for the U.S., Morgan Stanley estimates. With the Asian country poised for its slowest expansion since 1990, commodities including crude oil and wheat are tumbling even as American manufacturing and employment gain. Investors this month pulled $21.3 million from U.S. exchange-traded funds backed by industrial metals, a 6.2 percent drop that is the biggest of any commodity group, data compiled by Bloomberg show.
“As goes China, as goes commodities, as goes copper prices,” Jeff Sica, who oversees $1.5 billion as chief executive officer of advisory firm Circle Squared Alternative Investments in Morristown, New Jersey, said in a telephone interview yesterday. “Copper prices are going to decline based on an economic slowdown in China before they do in the U.S.”
Copper for delivery in three months touched $5,353.25 a metric ton yesterday on the London Metal Exchange, the lowest since July 2009, and traded at $5,666.50 today. Led by a slump in crude oil, the Bloomberg Commodity Index of 22 raw materials fell 1.6 percent this year, touching a 12-year low yesterday.
Investors are bailing out of commodities after a decade-long bull market led producers to boost output, spurring gains in inventories. The World Bank cut its outlook for 2015 global growth to 3 percent on Jan. 13, down from a projection of 3.4 percent in June. China will expand 7.1 percent, slower than an October outlook of 7.2 percent and June forecast of 7.5 percent.
Copper will drop as low as $4,800 this year, down 13 percent from yesterday’s close, according to a median of nine estimates from analysts and traders surveyed by Bloomberg.
Refined production will exceed demand this year by 221,000 tons, widening from 59,000 tons in 2014, Gayle Berry, an analyst at Jefferies Bache Ltd., said in a Jan. 7 report. About 1.6 million tons of new mine supply may come online in 2015, Bloomberg Intelligence said last month.
Found in everything from car wiring to plumbing, copper has shifted from a bellwether of the world to one for China as the country grew to consume five times as much as the U.S., the No. 2 user. Demand growth in China will slow to 4 percent in 2015 from 5.5 percent last year, researcher CRU Group estimates. From 2002 to 2012, it averaged more than 10 percent.
The price slump may force mining companies to cut production, and some are struggling to meet output targets. The 2015 surplus will be 98,000 tons, Macquarie Group Ltd.’s Vivienne Lloyd said this month. That’s down from an estimate of 475,000 tons in October.
While China is slowing, BHP Billiton Ltd., the world’s biggest mining company, expects the nation’s growth will be strong enough to underpin consumption. About 250 million more people may move from rural areas to cities in the Asian country by 2030, bolstering demand for products including metals and food, BHP told investors at a Sydney seminar in November.
“Longer term, the prospects for copper seem quite bright, because developing economies are all talking about infrastructure build out,” Frances Hudson, a global thematic strategist at Standard Life Investments in Edinburgh, which oversees $422 billion, said yesterday in a phone interview. “While China might need less copper for its domestic market, it doesn’t mean copper consumption suddenly becomes inactive.”
The metal will rally to $7,000 a ton by the end of the year as supply growth slows and the global economy improves, analysts at Citigroup Inc. including Heath Jansen wrote in a report e-mailed today. Copper has one of the highest correlations among commodities against economic growth, according to the bank.
The 55 percent slump in Brent crude oil futures in the past year means cheaper energy and lowers the price floor for mining companies to remain profitable. About 90 percent of producers are still making money at current prices, and there might not be “disruptions” to supply until the metal trades below $5,000, according to Thomas Saulnier, portfolio manager at Gaia Capital Advisors.
There’s also the risk U.S. growth will falter. Retail sales in December slumped by the most in almost a year, government data showed yesterday, prompting some economists to lower spending and growth forecasts.
Hedge funds are expecting more price declines. Money mangers held a net-short position of 10,881 futures and options contracts as of Jan. 6, data from the U.S. Commodity Futures Trading Commission show. The investors have been betting on losses for 16 weeks, the longest streak since August 2013. The Bloomberg Industrial Metals Subindex dropped 6.8 percent since December, the worst start to a year since its inception in 1991.
“There is an old saw in the markets that copper has a Ph.D. in economics,” Dennis Gartman, economist and author of the Suffolk, Virginia-based Gartman Letter, said yesterday in a phone interview. “I’ve always maintained copper has a Master’s degree in economy. Not quite a Ph.D. When you look at copper and tin and zinc and aluminum in aggregate, they have a collective Ph.D. in economics and all of them are weak.”
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