Copper MMI Takes a Dip in September; No Surprise

by Raul de Frutos on SEPTEMBER 12, 2016

Our Copper MMI fell 5% during the month of August. The price drop is no surprise. Copper has struggled near $5,000 per metric ton multiple times this year and as we pointed out last month, buyers could expect prices to retrace in August.

Weaker Chinese imports over the past few months and the bearish calls of some major banks have contributed to the recent price fall. Unlike other base metals, sentiment about copper is still sort of bearish, making this metal the worst performer among its peers this year. In our monthly outlook, we haven’t recommended buying copper forward yet.

Chinese Imports Lose Momentum

China isn’t self-sufficient when it comes to its copper needs and is the largest importer of the red metal. Rising Chinese imports signals increasing demand for the metal. In metals such aszinc and nickel, we’ve witnessed a surge in Chinese imports this year, adding fuel to the bull (market).

In Q1, China’s copper imports were running at record levels but over the past few months imports are coming down. In August, China imported 350,000 mt of unwrought copper and copper products. This is the fifth consecutive month that imports have declined on a monthly bases and the lowest figure in a year.

The Non-Ferrous Laggard

Unlike zinc and nickel, remember we pointed out earlier this year that the increase in Chinese copper imports in Q1 wasn’t exactly backed by end user demand. Some of the Chinese refined copper imports found their way into the Shanghai Futures Exchangesystem, with inventories rising to record levels.

Now, as Chinese refined imports start to taper down, we are witnessing inventory buildup in the London Metal Exchange‘s warehouse system, with copper stocks in the LME rising to a one-year high. Combining LME, SHFE and Chinese bonded stocks, most would agree that global copper inventories have risen this year, keeping a lid on prices.

Supply Runs High

Copper is among the metals wherein top consumer China actually gains if prices stay lower, unlike aluminum or steel. The country is the largest copper importer. Therefore, lower copper prices bode well for China. This also helps explain why Chinese copper imports rose earlier this year. When prices are low it makes sense for China to import more copper instead of producing more domestically.

Another factor weighing down on investors’ sentiment is the recent bearish calls by investment banks such as Goldman Sachs. The bank notes that the majority of the major global copper producers have already increased output by 5% during the first half, and it estimates that those same producers will ramp up supply by 15% over the next year.

What This Means For Metal Buyers

Any price rally could continue to be limited this year, especially if Chinese demand does not pick up and we see the supply increase that some banks are forecasting. On the other hand, an improving sentiment in the metal complex this year should support and keep copper prices from experiencing significant declines.