The No. 1 commodity buyer in the world is China. Therefore, the natural result of weak trade data emitted from China is a downturn in the price of copper, accompanied by decreases in oil, coal, steel and iron ore. With export figures exhibiting a destabilizing Chinese economy, the U.S. stock market likewise takes a hit, along with the currencies of Australia and Canada.
Copper Prices Define China’s Financial Health
The financial system of China is enwrapped in its storehouse of copper. A full 60% of China’s stored copper is utilized as loan collateral. The aspect of copper as a monetary product in China has long since caused its price to rise above its value as an industrial metal.
After China’s recent disclosure of its sharp and unexpected decrease in exports, the London Metal Exchange (LME) saw copper prices fall to almost a three-year low. Globally, copper trading has dropped under $3 a pound, not seen since July 2010. On Dec. 3, 2014, high-grade copper earmarked for delivery in May 2014 fell to $2.91. The market prediction of a possible complete meltdown in the price of copper has thrown global investors for a loop.
The drop in copper is directly sourced in the economic slowdown of China. Binary options trading is the silver lining to this cloud, as there is an ongoing downward trend in copper prices. That trend can be utilized in the binary options market and traders are finding ways of profiting off the downturn.
February exports declined 18.1% as compared to the February 2013 data. The substantial drop sent China’s balance of trade into deficit figures. The financial outlook for China is a source of global concern. During the first week in March, a small Chinese company, Chaori Solar, defaulted on a bond payment. The seriousness of the default is highlighted by the fact that it was the first enterprise within the course of modern trading to do so. On the heels of that default is the corporate bond suspension of a second company, Baoding Tianwei Baobian Electric, from the Shanghai Stock Exchange (NYSE:SSE). The potential for imminent default led to the suspension.
The financial system that harbors company bond defaults is susceptible to a further decline in the overall economy. The two-pronged economic attack includes the increased reticence of banks to offer loans given the potential for default, and the inability of companies to utilize deflated copper as a security for loans. The vast number of Chinese corporations housing large debts faces a situation where essential new loans to absorb prior debt are increasingly harder to obtain. Many economists forecast a difficult landing for the Chinese economy in 2014.
In response to the decline in exports and the ongoing weakened financial forecast for China, the government lowered its yuan in the hopes of jump-starting an increase in exports. However, it is the downward trend in the value of copper that focuses the world on the continuing destabilization of the country’s economy.
Copper as an International Economic Predictor
With a long history of use in industry, copper is often noted by analysts as a focal point in the assessment of the global economy. The use of copper as an indicator of the financial health of individual nations has been upgraded in respect to China. In addition to its use in Chinese manufacturing, businesses have imported massive quantities of the metal, produced as loan collateral.
The New York Metal Exchange has recorded a current precipitous and continuing drop in the price of copper as of March12. The year 2014 has already seen a fall of 13%, with over 4% down during the second week of March.
The price of copper is forecast to deteriorate further. The question appears to center around the degree of the decline. At the end of the day, investors are wondering how much will be left in the value of this metal. Some analysts predict a total crash. Others take note that with the end of China’s Lunar New Year celebrations, quarter two may see an upswing in China’s economy and in copper.
In the likely event that lenders will tighten the reins, a diminishing amount of copper will be needed as collateral for loans. Further, the present drop in price has created a decrease in the use and acceptance of copper as security for debts. Both factors will lead to the dumping of huge amounts of the metal onto the market. Since supply and demand play a large part in market prices, an enormous increase in the copper supply will force the price to plummet.
Chinese businesses would obtain only a small portion of their initial outlay for copper upon a return of the asset to the marketplace, incurring large losses. It is apparent that a continuing decrease in copper will further erode the financial base of China.
The Global Economy
As nations struggle to leave the Great Recession of 2008 behind them, there is a realization that a slowdown in any major economy will cause the remainder of the globe to falter. Therefore, the world is concerned about a downturn in the financial stability of China. A sudden deficit in China’s trade balance has duly alarmed investors and adversely affected many markets.
China’s export decline caused the Australian Dollar and its Canadian counterpart to decrease against the USD. February U.S. hiring figures, disclosed during the initial week of March, showed a modest increase, yielding a stable U.S. dollar as against other prime currencies. The GDP of the U.S. grew 3.2% in quarter four. However, the monetary weakness in China drove the U.S. stock market down by 0.5% to 16,369.76, and decreased a worldwide stock index by a comparable 0.5%.
By far the greatest negative effect of the decline in the exports of China was felt by the global mining sector, a testimony to China’s voracious acquisition of raw metals. The question remains as to whether China has the ability to turn around its economy, thereby reversing the current downward trend in the price of copper.