Thursday, June 18, 2009 3 comments ++[ CLICK TO COMMENT ]++

Dr Copper about to take a rest

Historically, the commodity with the greatest signalling capability was copper. In fact, it is thought to be so sensitive to the economy that it was given the "Dr. Copper" monicker—it's copper that has a Ph.D in economics, not oil ;). In the last few months, copper has rallied strongly and this is one factor giving confidence to market participants.



Unfortunately, according to a Bloomberg story today, a Chinese analyst is speculating that copper purchases by China may slow:

China’s copper demand may drop in the next quarter as the State Reserve Bureau will probably cease purchases and as consumption in the world’s largest metals buyer weakens, a trader at Jiangxi Copper Co. said.

Prices will decline in the next two to three months as Chinese imports fall, Zhao Mingwang, manager of futures trading at Jiangxi Copper Products Co., said in a phone interview. The unit of Jiangxi Copper, the nation’s biggest maker of the metal, produces wires and rods.

China’s copper imports climbed for a fourth month to a record in May, fueling a 63 percent price rally this year. Falling exports and profits, overcapacity and rising unemployment are making it harder to revive economic growth in the world’s third-largest economy, China’s cabinet said June 17.

“Demand is not as good as people had expected,” Zhao said. “In the second half, the SRB is unlikely to buy more, so copper price fluctuations will solely rely on real demand. The third quarter will be a slow season, so we expect copper to fall.”


This is just some analyst, albeit at the largest copper user in China, so one may be prone to dismissing this as being no different than any Wall Street analyst speculating on the future. However, there is an important insight. The analyst is actually saying that "demand is not as good as...expected". That's saying a lot. If the analyst is actually feeling weak demand, right in front of his eyes, then we should, at least the macro-inclinded amongst us, be very cautious.

If this weakening of copper demand is a pre-cursor to weak Chinese growth, expect other commodities and assets to start selling off. One can never be certain and I wouldn't bet blindly on this but it's something one should be watching carefully.

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3 Response to Dr Copper about to take a rest

contrariandutch
June 19, 2009 at 6:27 AM

China is a bit of a conundrum right now. The government reports strong growth and plenty raw material is imported, yet profits and exports are down massively and electricity consumption is down as well. The latter parts suggest nothing healthy. And as Macro Man pointed out chinese commodity imports have been ridiculously high even for a full-fledged boom. Odd that, and worth watching very closely.

regardig Spain, and continuing from a prvious thread, Spain certainly has a reasonable government debt to GDP ratio. But so does Latvia. This crisis is proving Adam Smith wrong when he claimed that "no nation is ever ruined by private profligacy". It is private debt that is killing them.

Spain and Italy, and to a lesser extend France, have never been able to restarin wage growth to match productivity growth. As a consequence they always lose competitiveness vis-a-vis Germany and start running big trade deficits. The traditional solution is to devalue, but it can't be done now. Massive wage deflation is no good either, but it will probably happen at great cost to creditors.

Meanwhile, the view "on the ground" is pretty terrible. everything real estate related crashed in october last year when the banks shut down the credit flow. There is no sign of recovery, on the contrary, and brokers, sollicitors and developers are shutting down or downsizing massively. Layoffs are beginning to pick up outside the real estate complex too. Government sponsored "reduced work" schemes" are running out and the hoped for improvement isn't there. And the banks just will not lend, regardless what they claim in the media.

contrariandutch
June 19, 2009 at 11:46 AM

Oh, before I forget, the euro is propably a net positive for Spain, Italy et. al as without it a full-fledged currency crisis would probably have happened already. 

Sivaram
June 19, 2009 at 1:54 PM

Euro likely helps Italy. It's debt is really high, relative to GDP, and it presently benefits from being associated with the Euro. For Spain, it probably doesn't help since its debt to GDP doesn't seem that high, and it will probably have an easier time devaluing its currency if it weren' tied to the Euro.

One of the things about Europe is its stronger social safety net and so won't face as big of a social crisis as, say, Latin American or Asian countries routinely face.


As for China, I've been bearish for a few years now but even I will admit that it is difficult to know if things are really prone to breaking or not. As I have indicated several times, my problem is that their GDP growth numbers are "hard to believe". The bearish implication of this is that it may be sitting on top a huge bubble.

However, on the bullish side, it is also possible that the reported numbers are wrong or inaccurate in some manner. Just like how some of their popularly reported unemployment numbers exclude migrant workers, it's hard to say what is real and what is not. If the numbers are higher than what they really are, then it may not be in as big a bubble as I believe.

One other thing to keep in mind is that a lot of the activity, either good or bad, in the rural areas is not captured (this is similar to India and many other undeveloped or developing countries.) If rural incomes continue to rise or if the employment situation is stable in rural areas, China can keep going. The export-oriented coastal areas will face some difficulties but th rest of the country may be ok... but I have no idea. I'm still bearish but everything is murky over there.

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