How long can China crush Copper prices?

A few months ago, we were hailing the rising copper prices as a bellwether indicator of how well the economies were doing. In reality, it turns out you can have too much of a good thing and China needed to step into the markets to calm things down.

Weekly Commodity Analysis


Today’s data out of China showed that exports had risen to 32.2% year-on-year to $281.42 billion in June 2021. China’s main stock market had already been elevated after the Chinese government unexpectedly announced a broad-based RRR cut to be effective later this week ahead of the GDP figures. China’s economy grew at a record pace in the first quarter of 2021 expanding 18.3% from a year earlier, and this was due to the base effects from 2020 and the COVID-19 disruptions.



The data point was massive but GDP expectations by analysts were 19% so it came in slightly under expectations, that said, It was the strongest growth since at least 1992 when official quarterly records started. This week’s reading for GDP is expected to be a more modest 8%, but if the GDP rate is to fall what does that mean for commodity prices?


The talk from April 2020 was of massive capital expenditure in commodities as the global economy re-opened gradually from being almost entirely shut down in Q1 2020. With China and the USA leading the way with massive infrastructure plans. Initially, President Biden and his administration were going for multiple trillions in extra spending. Biden wanted to go big like Franklin D. Roosevelt but over the last 6 months, the Bi-partisan deal is looking likely to be just shy of $1 trillion in new spending. The bipartisan deal would pay for rebuilding roads, bridges, and other traditional infrastructure projects and bring broadband internet service to more rural areas.


The commodities needed for infrastructures like Copper, Nickel, and Iron were all in a rising trend due to the increased demand and supply disruptions. In 2020 the US dollar also took a massive hit after being the go-to safe haven during the start of the global pandemic due to its global currency reserve status. Bottlenecks still occur in supply chains, and mines are notoriously slow to get to production, so oversupply is a long way off. China had been stockpiling copper as imports made up for the lack of domestic resources. China imports around 80% of its annual copper consumption, 10.9 million tonnes of 13.5 million tonnes annually. Those imports represent more than one-third of the copper market.


As prices reached new all-time highs something had to be done or prices of goods and materials would become too expensive and the manufacturer's bottom line would be crushed. Back in May 2021, the National Development and Reform Commission in China said regulators would closely monitor the commodity price changes and strengthen regulation of both futures and spot markets. The threat of investigation into illegal practices and hoarding, along with new regulations caused Chinese domestic prices to plunge in the last week of May.


By July China’s copper imports had fallen for a third straight month as sluggish manufacturing growth began to weigh on demand. China had also announced plans to release industrial metals from its national reserves which curbed commodity prices further.


The idea was to support the manufacturers and factories whose input prices were growing exponentially but were unable to pass on the increased costs to the end-users.

Having stable commodity prices may now be having the desired effect of encouraging industries to increase production as their margins widen.


Supply constraints will still be an inflationary factor and it has been reported before by analysts from Bank of America, that the world risks running out of copper by 2025 and that the commodity could be trading at $20k per metric ton. The recent dip from the highs can be attributed to the moves made by Chinese authorities but the reality is increased demand versus constricted supply will only lead to higher prices again in the future.


With commodities being priced in US dollars, the rising greenback is also helping to put a ceiling on commodity prices. The Federal Reserve is slightly more Hawkish and is putting it out there that they could be raising rates in the next couple of years. This is going to make the US dollar more attractive with rate differentials favoring the dollar. Today’s US CPI data showed the inflation measured by the Consumer Price Index rose by more than expectations, which if that translates to PCE, the Fed will have to consider acting earlier. The headline figure today is US inflation rate is now 5.4% up from 5% and was driven by used car and truck sales. Food and energy were also a big factor in the rise and the trend has been up every month since January 2021. With the majority of the rising CPI based on cars and trucks, the markets are still buying into the transitory inflation narrative.


Today we can see that the copper prices are continuing to fall, and they are disconnecting from risk-on assets like the Nasdaq 100 equities. The Nasdaq (blue) continues to push higher towards a target of 15,000 in spite of the rising CPI data. If the markets were worried about increasing long-term inflation the tech stocks would be hit harder.


On an intraday basis, the copper prices are within a tight range, currently, and buying the dips may have been a good strategy, if the US dollar was to weaken. As it is, this level of support may give way and become resistance in which case, we should be looking to short the Copper contract on a retest of old support if it holds as resistance.


Looking left along with the longer-term chart, March through to April 2021 was a reasonable area of balance, so prices could halt within the range again, and from there the fundamentals will provide further directional bias. Long-term bears would be keen to add to shorts on a test of the lows around 3.94 on the futures chart.


The commodity cycle is still bullish but any asset that exponentially rises needs to pull back into value. I would be keen to buy the asset once again, but the infrastructure bills would need to pass through the US senate first and China would have to show a willingness to spend too, rather than their current rhetoric of curbing prices. For now, it is a case of wait for a break lower of intraday support, then wait for a retest of old support before taking the continuation trade lower. Keeping an eye on the fundamentals for a change in the underlying conditions.

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