Investors are backing away from copper after the biggest two-month rally since 2012.
The problem is that demand is slowing in China, which accounts for about half of global copper use. Producers including Freeport-McMoRan Inc say Chinese buying has not picked up as it normally does at this time of year, and Goldman Sachs Group Inc and Societe Generale SA are among banks predicting lower prices.
The metal is losing its appeal for money managers, who have reduced their net-long positions for two consecutive weeks, according to US Commodity Futures Trading Commission (CFTC) data.
Analysts, traders and hedge funds surveyed by Bloomberg last week were split on the price outlook, assessing rising inventories and prospects for reduced China consumption against aging mines that would mean limited supply gains.
“The market isn’t sure about how much production we’re going to see and how much Chinese demand there’s going to be,” said Paul Christopher, the St Louis-based head of international strategy at Wells Fargo Investment Institute, which oversees US$1.6 trillion. “There’s still lingering concern about excess inventories, especially in the second half of this year.”
The metal climbed 9.8 percent in the two months through March 31, the biggest such gain since August-to-September 2012, amid speculation that China would increase stimulus measures, while operating glitches at some mines threatened to erode supply.
Copper futures on the Comex in New York lost 17 percent last year and are down 1.8 percent this year. This year, the Bloomberg Commodity Index has dropped 2.2 percent, while the MSCI All-Country World Index of equities advanced 4.1 percent. The Bloomberg Dollar Spot Index climbed 4.8 percent.
Speculators cut their net-long positions in copper by 7.3 percent to 14,295 futures and options in the week ended on Tuesday last week, CFTC data show. Those wagers were trimmed 9.8 percent in the prior week. Total long-positions, or bets on higher prices, were reduced by 6.3 percent in the latest report, the most since Jan. 20.
The IMF on Wednesday last week highlighted the threat of a “retrenchment” in Chinese industries that are facing overcapacity, as well as in the country’s property market. Financial stress among Chinese real-estate firms could cause “cross-border spillovers,” the fund said. The IMF also said that risks to the global financial system are rising as emerging markets face a squeeze from the strong dollar and weak commodity prices.
Those worries have some analysts sounding the alarm on copper. In a report on April 12, Goldman cast doubt on the durability of the recent rally, saying demand will decline as fewer houses are built by China’s construction industry, which generates about 60 percent of the nation’s annual consumption of the metal. The bank estimated prices in London would fall by at least 15 percent by the end of the year.
Economic data last week from the US added to demand concerns, as industrial production last month dropped more than economists forecast and applications for future home building slid the most in 10 months. The Copper Development Association says construction accounts for about 40 percent of the commodity’s use.
Societe Generale said lower energy prices and weakening producer currencies against the US dollar are cutting costs for mining companies, spurring output.
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