Copper’s delicate balance

Shortly after hitting its year-to-date low of $5,518 per metric ton on the London Metal Exchange (LME) last week, copper bounced back, closing the week at $5,833, writes Any Home in a column for Reuters.

He says the market was helped by news of China and the U.S. resuming trade talks and by “copper’s still robust internal supply-demand dynamics.”

Despite the three-month copper price increase, Home writes, “Funds remain heavily short, betting that copper demand is set to worsen amid what is looking like a synchronised downturn in the global manufacturing sector.”

Home points to dark clouds that are affecting sentiment for copper, including the declining Institute for Supply Management (ISM) index that measures U.S. manufacturing activity. The ISM fell from 51.2 in July to 49.1 in August, marking the fifth consecutive monthly decline and the first time the figure fell below the 50 percent threshold, indicating contraction.

The situation in the U.S. is slightly better than that in Europe. Home writes, “In the euro zone, manufacturing activity has been contracting for seven straight months with German copper products maker Wieland reducing working hours this month in the face of disappointing demand.”

China’s Caixin purchasing managers index was at 50, while the country’s official index showed contraction for the fourth month in a row, he notes.

“Given such flashing warning signals about the health of global manufacturing,” Home writes, “it should be no big surprise that funds continue to hold a big collective short position on the CME (Chicago Mercantile Exchange) copper contract.”

He adds that as economic indices deteriorate, “the greater the expectations for a stimulus reaction whether it be in the form of U.S. Fed interest rate cuts, more quantitative easing from the European Central Bank of more infrastructure spend from China.

“The latter may be one reason why Chinese speculators don’t much fancy going short copper, even if it’s clear they’re not enthused about going long either," Home writes.

John Gross of The Copper Journal, Huntington, New York, says numerous contradictions are affecting the copper market, writing, “While the global economy slows, and expectations of a recession become a near foregone conclusion, equity markets continue rising.”

Gross also points to the declining August ISM index, noting, “Conversely, the ISM Non-Manufacturing Index rose to a three-month high of 56.4 last month.”

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He adds that August also saw a continued rise in precious metals “despite a stronger dollar, as the flight to safety intensified.”

Gross concludes, “But most nonferrous metals fell last month, ostensibly because of the stronger dollar, coupled with fears of slower global growth.”

Some 45,000 metric tons of copper were warehoused during August, Gross notes, bringing the total warehoused inventory to a 12-month high of 521,000 metric tons and sending the price to a 27-month low of $2.57.