Monday, September 5, 2011

Price of copper suggests world economy on right track



If copper is worth its mettle in predicting the financial future, it appears the global economy isn’t headed off a cliff after all.
Despite a growing number of indicators that global growth is slowing, the steady price of the red metal, dubbed “Dr. Copper” for its ability to diagnose economic activity, is signalling the economy may not be as sick as it seems.


In fact, copper, a metal used in everything from power and construction to cars and cellphones, looks relatively healthy right now considering the recent commodities sell off.
Copper (HG-FT4.03-0.10-2.41%)averaged $4.20 (U.S.) per pound in August, according to Bloomberg, not far from a record $4.60 set six months ago, and dipped only briefly below $4 during the recent market turmoil. On Monday, it closed at $4.06, still considered resilient and at a level that remains highly profitable for most mining companies.
Yet the global economic picture isn’t improving.
World factory output slowed in August amid worries over mounting debt in the United States and Europe, and job creation in the U.S. has come to a standstill. Canada’s economy contracted in the second quarter for the first time since the recession, and even almighty China is gearing down from its rapid growth. New export orders in China, the world’s largest consumer of copper, fell for the first time in two years in August, reflecting a softening of the global economy. To add to the woe, European stock markets were hammered on Monday on renewed fears of a debt crisis and concerns about the global economy.
But as prices for certain industrial metals remain firm, either Dr. Copper is losing its prescriptive power, or the economic doomsday predictions are overblown.
A lot of analysts are siding with copper.
“At the end of the day, it’s signalling that things are going to be pretty good,” said Bart Melek, head of commodity strategy at TD Securities. Around current levels, copper “at $4.20 doesn’t spell lousy economic activity.”
A global shortage of copper, made worse by strikes at some major producing mines around the world, is helping to prop up the current price.
China has also reportedly been buying more of the widely used industrial metal in recent weeks, around the time the price hit an eight-month low $3.83 per pound in early August.
Although China is deliberately cooling its economy to tame inflation, investors believe the country’s double-digit economic growth will continue to drive demand for copper for years to come. Miners are also counting on regular supply disruptions and new project delays to prevent the price from falling long-term, as predicted.
These are some of the key reasons behind the world’s largest gold producer, Barrick Gold Corp., deciding to buy copper producer Equinox Minerals Ltd. for $7.3-billion earlier this year.
Other miners are also spending billions to either buy other copper producers or expand their existing production, even with several analysts forecasting copper will drop steadily to around $3 by 2015.
“Copper prices – the bellwether underpinning other base metal prices – remain exceptionally lucrative for mining companies” at around $4 per pound, yielding average profit margins over costs of 66 per cent, noted Patricia Mohr, vice-president economics and commodity market specialist at Scotia Capital.
Copper is currently in a supply deficit, which Ms. Mohr said is expected to continue throughout 2012.
In a recent report, Goldman Sachs said it remains “very bullish” on copper. It sees prices rising in the short term as a result of supply disruptions that will impact about 8 per cent of global production this year.
Still, some analysts are skeptical that the price of copper will continue to hold its ground.
That China bought more copper when prices were lower last month is to be expected, Ross Strachan, a commodities economist at Capital Economics in London, said in an interview.
“I would be reluctant to say that China is going to come rushing in and push prices significantly higher than where they are now,” said Mr. Strachan, who sees prices dropping to around $3.62 before this year is over.
While he believes fears of an imminent so-called “hard landing” in China are overdone, Mr. Strachan said a drop in economic activity is a threat to high commodity prices.
“China’s economy is still likely to slow over the next few years as the pool of cheap labour dries up and as weakness in global demand undermines exports,” Mr. Strachan said in a recent note.
“What’s more, the end of the unprecedented investment boom should mean that growth becomes less commodity intensive, rather than more. Even if activity does pick up over the rest of the year, buoyant Chinese demand cannot be taken for granted over the medium term.”

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