by Raul de Frutos on MAY 9, 2016
Coper prices have trended higher since they fell to a seven-year low on January 17th, but the metal hasn’t gained as much as other base metals like tin or zinc.
Improvements in commodity markets made copper prices stop from falling but investors are not yet excited enough to trigger a bull run in copper prices.
Overcapacity issues are still visible. Last December, a group of Chinese smelters announced intentions to cut refined copper output. However, recently, China’s largest copper producer, Jiangxi, said those output cuts have been offset by new capacity in the country. Therefore, everyone seems to agree that the market is oversupplied even as producers slash costs.
Can Prices Only Fall?
The outlook for copper is still challenging and many of the industries are still facing overcapacity. However, there are a couple of factors pushing commodity markets up and copper prices could still rise.
Momentum Picks Up in China
China’s manufacturing activity has shown signs of improvement in 2016. China’s manufacturing PMI came in lower than expected in April but the numbers were still above 50 for the second consecutive month this year.
The Chinese automobile sector also saw improvements this year. A tax reduction on smaller vehicles last September helped a seven percent growth in Chinese passenger vehicle sales in the first quarter.
In real state, the numbers also showed positive improvements. China’s investment in fixed assets rose by 10.7% in Q1 while new construction starts have also risen by 19.2% in the same quarter after falling for two consecutive years. Finally, Chinese copper imports in March jumped 39% from the same period last year and have hit an all-time record.
The Federal Reserve is not hiking rates as fast as markets had expected. On top of that, there are many questions regarding the ability of banks in Europe and Japan to lower interest rates more from here. This caused the U.S. dollar to weaken this year, having a bullish effect on commodity markets. If the dollar keeps weakening this will play in favor of copper prices.
What This Means For Metal Buyers
Copper prices have held well this year but we haven’t seen a significant rally yet. Copper prices are now running up against resistance and the question is whether prices are just consolidating before they move higher or we will see another sell off.
If monetary policies keep driving the dollar down and the upturn in Chinese demand is for real (at least for an extended period of time) then we could see higher copper prices this year. However, in a year full of global uncertainties, bears might not be out of sight for too long.