Copper, because of its widespread usage, is considered “the barometer of global growth.” For years now, it has been an effectual forecaster of global development and other commodities.
A giant economy translates to industrialization and progress, which are both acquired through infrastructure development. Seven years ago, the copper market collapsed when giant economies abided by the austerity measures mandated by their respective governments. The so-called global financial crisis of 2008 turned copper into a precarious, unstable market.
Market players and analysts blame it on China, the world’s largest economy. China’s growth declined in the past years, and one big reason for such is its shaky infrastructure development segment.
In 2013, China’s overall private and government debt stood at 217% of its GDP, a staggering 147% increase from 2008. The economic bubble, or the country’s growing debt burden, forced many companies—both electrical and engineering firms—to moderate their production. This meant that they had to minimize their base metal importation, too.
China is responsible for up to 40 percent of global copper consumption. Add to this the fact that almost 60 percent of the country’s total copper is used as trade collateral. That’s why when its economy declined in the past years, a lot of its copper-backed loans and financial vehicles began to loosen, affecting copper’s price on the global market heavily.
Copper, as of today, is the weakest in terms of price among other base metals. And it is so shaky that analysts had to adjust recent forecasts from stable to sliding.
Standard and Poor’s dropped its prediction for copper from $3.10 per pound to $2.70 per pound for 2015 and 2016. Goldman Sachs changed its forecast to about $2.83 per pound. Both analysts deduce that even though it’s a bit high compared with its last price, to see copper in its old shape is still far from reality.
Last year, McNeil Curry of Bank of America said that gains for copper would be temporary and limited. Veteran China-watcher Simon Hunt predicted a sharp rise and a subsequent fall again in 2016 after a relatively stable 2015.
The problem with copper today is that it does not share the resilience of other base metals like nickel, which manages to stay stable amid its ailing supply segment.
Last trading, only zinc slipped, while aluminium, lead, tin, and nickel rose, which prompted many analysts to believe that it could finish 2015 with prices enough to draw investors in 2016.
Copper’s price fluctuations are not just because of China’s reluctance to import. The overabundance in supply awaiting buyers, the decreasing global demand, low oil prices affecting dollar-denominated commodities, as well as the US dollar strength are all pulling copper’s market power down.
Copper’s route is more perplexing than its other base metal counterparts. Unlike copper, nickel’s undersupply can be solved by tapping new miners to double their production, or to intensify their exploration operations. That is what’s saving nickel now.
For instance, the nickel segment boasts of small mining companies like Amur Minerals Corporation (OTC:AMMCF) and Asian Mineral Resources (CVE:ASN) that keep investors keyed up towards its market position. The Indonesian ore ban, despite altering the base metal segment, forced nickel suppliers across the globe to double its production efforts, creating a notion of buyability towards investors.
Conversely, what copper needs are buyers, purchasers, and consumers. But how could such a thing be possible if its largest consumers are suffering from an economic problem?
Oversupply, unlike supply shortage, can’t be solved by policies of sorts; the only way to fix it is purchasing power sustained by a potent economy. Sadly, the biggest copper consumer, China, is not capable of such a thing today.
Copper, fortunately, is finding its way to gradual growth now.
In January, new loans in China hit its highest in five years at 1.47 trillion yuan after having been around three-week highs of $5,793. Its recent trade at $5,738 is up $2 on last trading.
According to a trader, copper acts as though in short-covering mode with it rising to upside technical resistance levels around $5,800, specifying that the interest rate in Shanghai copper is falling in the lead-up to the New Year holiday that starts in the first week of February.
Still, analysts argue that its recent prices do not assure a more stable 2015, as Chinese copper consumption remains low and ailing.
However, fundamentally speaking, traders believe that a reversal in copper’s condition may also come from China itself. An increase in infrastructure and power utilities spending could be enough to offset the declines in Chinese real estate. But this, too, remains distant, as 50 percent of the country’s copper usage comes from the real estate sector, which is currently sliding towards a downward trend.
Perhaps the closest thing to good that analyst see in copper is that it's heading to a new and lower equilibrium point. To date, indicators persuade investors to risk on copper. In that regard, 2015 is the year of other base metals such as aluminium, lead, tin, and nickel.
