Copper prices slump to six-year lows amid yuan devaluation and supply glut

A man works at the Tongling Nonferrous Metals Group Holdings Company's copper smelter in Tongling, China. Natalie Behring / Bloomberg

Hedge fund bets that the worst is yet to come for copper are coming true.

On Wednesday copper slipped to six-year lows as China’s yuan headed for the biggest two-day drop in two decades. It was trading down 3.47 per cent at US$5,125 per tonne in London.

The currency weakened 1.8 per cent to a four-year low of 6.4392 per US dollar in Shanghai after a 1.8 per cent tumble on Tuesday. Policymakers cut the daily fixing yesterday by 1.6 per cent.

Prices for the metal used in everything from homes, cars and appliances are stuck in the worst slump in more than two years. Stockpiles jumped 11 per cent in Shanghai last week. With China’s economy showing little signs of recovery, money managers are increasing wagers that copper will fall further, pushing their net short position to the most bearish since April 2013, US government data show.

China accounts for about 40 per cent of global demand, and consumption is slowing at the same time that supplies are becoming more plentiful. Morgan Stanley predicts that while mine production was stagnant last year, output will rise almost 5 per cent this year and keep growing through 2018.

“Copper is very oversupplied,” said Dan Heckman, a national investment consultant at US Bank Wealth Management, which oversees about US$127 billion in Kansas City, Missouri. “Until you get more balanced supply and demand, I think copper continues to have a very challenging time.”

Dharmesh Bhatia, the manager for commodities market, at Emirates NBD Securities in Dubai, said he did not expect base metal prices to materially improve over the next 12 to 18 months. “The basket of metals including copper, zinc and nickel faced downside risks amid an uncertain global economic recovery.”

Ole Hansen, Saxo Bank’s head of commodity strategy, said the “surprisingly subdued economic activity in China this year combined with the recent slump in stocks, which carries the risk of undermining consumer confidence even further, have put metal prices under pressure”.

Speculators held a net short position in copper of 33,547 futures and options contracts as of August 4, according to Commodity Futures Trading Commission data released last Friday. That compares with 25,746 a week earlier.

Commodity slump

The money managers’ outlook for copper could be a bad omen for commodity bulls, because the metal has historically been used as an indicator for what is to come in raw materials and as a gauge of global expansion. The Bloomberg Commodity Index dropped 1.4 per cent last week, a fifth straight loss and the longest slide since January. Eighteen of the 22 products tracked by the gauge are stuck in bear markets.

But are there any opportunities to profit from the metal? Mr Hansen thinks not. “I primarily follow copper and currently the investment opportunities here are limited. One point of interest is the investment flows,” he said. Money managers are holding a near-record short position, so any additional announcement of Chinese stimulus could trigger buying from short positions being scaled back, according to him.

Warren Kreyzig, a commodities research analyst at Julius Baer, said although prices might have undershot on mounting bearish sentiment in the futures markets, “we do not see lasting upside and advise against bottom-fishing. Prices should remain lower for longer and we maintain our neutral price outlook”.

Disruptions at mines could help to stem the plunge for copper.

Mr Bhatia said low commodity prices should prove a challenge to high-cost producers. “While this suggests to us that commodity prices have room to recover in the long run as supply consolidates, risks in the second half of this year are high. For investors looking for a turning point, we suggest watching four factors over the next three to six months,” he said.

In Chile, the world’s largest source of the metal, protests by employees of companies hired by Codelco stretched into a third week. Workers who stormed the miner’s Salvador operation on July 22 took over its Hales mine last week. The state-owned company estimated damages at $15 million.

Freeport-McMoRan, the biggest publicly traded base metals producer, said last month it would review its mine plans and might cut output of copper and molybdenum to preserve supplies for when market conditions improve.

Supply disruptions

“The base metals producers perhaps have done a lot more than the energy sector in terms of cutting capex to get ahead of the game,” said Frances Hudson, an Edinburgh-based global thematic strategist at Standard Life Investments, which oversees $383bn. “In the copper market, we’ve seen some supply disruptions, which perhaps give an inkling that there’s light at the end of the tunnel.”

Ample inventories can help to cushion supplies even amid mine stoppages. Stockpiles tracked by the London Metal Exchange rose for a sixth week and are now at 354,125 tonnes, the highest since January last year. In warehouses monitored by the Shanghai Futures Exchange, inventories climbed 11 per cent to 114,000 tonnes last week, the biggest gain since February 26.

More production

Production is rising after prices more than quadrupled from 2000 through the end of 2012, as miners struggled to keep up with China’s booming economy. Futures in New York are heading for a third annual loss in a row, with increased output coming to market amid slowing consumption from Asia.

There are more signs of abundant supplies. The costs to treat and refine ore concentrate in China climbed about 5 per cent last month from June, the first gain in 10 months, Bloomberg Intelligence estimates. The fees usually rise when production outstrips demand.

“The pattern of lower prices is likely to continue until we see some signs of stability in the Chinese economy and see some signs of a bottoming,” said Alan Gayle, a senior strategist for Atlanta-based Ridgeworth Investments, which has about $42.5bn in assets. “The bears have a stranglehold on the market.”

* With additional reporting by The National

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