Drop in Copper Price Tied to China, Dollar

April 19, 2012
Spot copper prices and short-term futures broke below $3.70 per pound on the Comex and London Metals Exchange (LME) markets over the past couple of weeks based on new estimates of China’s growth prospects and renewed softness in the U.S. construction market.

Spot copper prices and short-term futures broke below $3.70 per pound on the Comex and London Metals Exchange (LME) markets over the past couple of weeks based on new estimates of China’s growth prospects and renewed softness in the U.S. construction market.

Where copper prices will go over the next few months remains (as always) a bit of a mystery as solid fundamentals face off against some countervailing trends, says John E. Gross, a long-time analyst of the copper market.

Gross told Electrical Marketing he expects copper prices to continue hanging around the $3.75 neighborhood for 2012 as a whole, but he notes that several factors could disrupt that forecast.

The fundamentals of supply and demand argue for higher prices, he says, as copper inventories handled by the Comex and LME have been declining and the global copper market continues to show a deficit, though a smaller one than the 360,000 tonne shortfall seen in 2011.

The price of copper in London has been in backwardation, meaning futures prices are below spot prices and rise as the contract approaches maturity, which is typically supportive of a bullish outlook. Gross said the fundamentals argue for prices above $4 per pound of copper.

On the other side, however, the construction market in the U.S. continues at depressed levels and though the automotive market is showing some life it’s not enough to compensate. The outlook for Europe, ranging from no growth to a possible recession, further depresses prices.

On top of that the value of the U.S. dollar is expected to rise, putting further downward pressure on commodity prices across the board.

China’s consumption outlook is “the great mystery of the copper market,” Gross said. “Their imports have been strong, but the question remains how much of that is being consumed, versus going into inventory. No one has the answer because no one has a clear understanding of their statistics.”

Gross puts out a free weekly report and monthly statistics on the copper market at his website, jegross.com.