Just a few months ago, the outlook for copper was, relatively speaking, not all that bad. While prices for other base metals were well off their highs, copper had somehow managed to escape the wrath bestowed upon its cousins, lead, tin, nickel and zinc, all of which were down severely from their respective peak levels. But nothing escapes the gravitational pull of economic and fundamental laws forever, and copper is no exception.
There is no description of the copper market during October 2008 that can properly portray the carnage that unfolded. Indeed, once the $3.00 level was decisively breached, it was as if a dam, holding back a massive body of water gave way, and once it let go, there was no way of stopping the flood of sell orders that entered the global marketplace. From the Spot close on Comex of $2.89 on September 30, 2008, copper lost fully 36% of its value over the course of the month to close October at $1.84, off $1.04 from the end of September, with the monthly average price off nearly $1.00. Take a look at the last page of this report, as you can see, this move was unprecedented, by a wide margin. If there is anything good that can be said, it is that copper at least managed to bounce back up from its $1.60 low. And if that isn’t bad enough, the market is now down $2.24, or 55% from its record high close of $4.08 set on July 2nd.
Necessarily, the question that begs an answer is where do we go from here? As you know only too well, even under the best of circumstances, that is a tough question to answer, and the current environment makes it virtually impossible. This is tantamount to asking how much money Central Bankers throughout the world will have to pump into the global financial system in order to restore some level of confidence, and free up frozen credit markets. That said, extreme markets lead us to think in terms of extreme possibilities.
To this point, it wasn’t that long ago, as prices of many commodities were marching onward and upward, the primary concern was with rising inflation. Today, however, the opposite is true as prices are falling across the board, raising fears of a deflationary environment. And it is occurring at a time when the wheels seem to be falling off the wagon, prompting not only draconian cuts in the cost of money, but also flooding the financial system with liquidity as well. Could it be that we will see an overreaction, with renewed inflation as the unintended consequence?
On the copper front, the questions are equally compelling. Last month, the International Copper Study Group reported significant revisions to the statistics, along with production and consumption forecasts. Of particular importance was a sharp downward revision to apparent consumption in China during 2007, that is also having a dramatic impact upon 2008 figures.
During 2007, Chinese consumption was originally reported as 4.888 million MT. This was revised down to 4.557 MMT, representing a 331,000 MT decrease. Correspondingly, global consumption was revised to 17.722 MMT, down from 18.048 MMT. Further, while it appeared the global market had a 23,000 MT deficit in 2007, new figures reflect a surplus of some 294,000 MT last year.
Given the reduction to 2007 numbers, the comparison to 2008 statistics warrants explanation. Prior to the revision, the year over year increase in China’s consumption was +3.8% through June. Basis the new numbers, with a lower 2007 base, year to date consumption through July is now up 12.2%. Inventory levels were also affected. Whereas it was thought global stocks were 993,000 MT at the end of last year, that figure was revised up to 1.422 MMT, an increase of some 429,000 MT.
Looking ahead, ICSG is taking a very cautious approach to their forecast, given all of the uncertainty. Presently, it is expected that mine production will increase 1.8% during 2008 and 10.7% next year. Production of refined copper is expected to increase 1.9% during 2008 to 18.359 MMT, with an additional increase of 4.3% in 2009, bringing the global total to 19.153 MMT. Consumption is expected to increase 3.0% this year to 18.250 MMT, with an additional 3.4% during 2009 bringing the total to 18.876 MMT. On the numbers, this means a surplus of 109K in 2008 with an additional 277K next year.
Clearly, these figures don’t lend themselves to a significant rebound in prices any time soon, unless inflation does pickup, or the global economy gets back on track much faster than anyone is currently expecting. Perhaps the better question to ask is “will the downturn be short and sharp, or long and tough”? Winston Churchill had an opinion on the subject in his ‘Never Give Up’ speech during World War II. If you would like a copy, we will gladly send it to you. [email: firstname.lastname@example.org]
Where Do We Stand Now?
That said, the market has created its initial boundaries of support at $1.60 with the first line of resistance at $2.15 – clearly, a wide range. A breach of support targets $1.50, where the market was in mid 2005. On the upside, if copper can get through $2.15, it will meet resistance every step of the way beyond that point. This is no time to drop your guard, however, as the market is severely oversold, suggesting a move higher – purely from a technical point of view.
Also, take a look at your monthly copper chart and note the technical rebound that occurred in 1996/97 following the sell off that began in 1995. Not to say it will happen the same way, or in a similar time frame, but a move up could take on a life of its own, despite what logic would suggest
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