It is now becoming clear that global growth remains very soft. Especially so for the commodity markets, after "outperforming" substantially in 2010 and 2011, as the largest stimulus in history worked its way through the system. It is now clear that growth in China has moved to a new structurally weaker pace, likely to be in the seven to eight per cent range.
Credit Suisse said in its research on copper, "While the price has fallen to this level several times in the past couple of years, on each occasion the dip proved relatively temporary. However, this time we feel the move lower is likely to be structural in nature. In essence, after trading closer to the top of the $6,000 to $9,000 range in place since 2006, we now expect prices to gravitate towards the bottom end of that band."
China's weakness is seen to be structural because to keep inflation under check China's central bank has adopted a tight liquidity stance and that is seen as a new normal in China. As a result, demand for industrial raw materials/commodities in general will remain subdued, and hence analysts predict lower prices in the coming months.
Priti Gupta, ED at Anand Rathi Commodities said, "Copper is fundamentally weak, and we believe the weakness will persist for some more time." Commodities like gold have seen a rebound in the last few days but copper fell unabated, with only marginal recovery visible. While economic data are unfavourable, stock situation at the LME and Shanghai exchanges is also adverse with stocks at multi-year highs. Hence, at every rise, there is selling, leading to the red metal touching new lows.
"This is a double whammy for copper, as demand is falling while stock position is rising on leading exchanges," said Gnanasekar Thiagarajan, director of Commtrendz Research.
He also said if copper fell below its technical support of $6,500, it could fall further to below $6,000 a tonne.
Credit Suisse said, "High prices have essentially included a 'scarcity premium' over and above the marginal cost of producing copper, a level currently at around $5,000-5,500 a tonne in our estimates. Copper miners have struggled to lift production and the universe of highly enriched deposits amenable to low-cost exploitation has shrunk. Costs have risen, and capital prudence has become the watchword. However, concerns over operational challenges and investment risks mask likely advances in adding supply already financed and committed as a consequence of the high price years. This supply has been delayed, not lost forever. This is where we believe the "bull case" for copper, at least for the next two to three years, is flawed; risks we feel lie in a lower level of disruption to supply than most forecasters use in their supply/demand models. Small reductions to these factors have a marked impact on expected surpluses."
* Demand in China seen weak as its central bank has tightened liquidity to keep inflation under check
* Stocks at the London Metal Exchange and Shanghai exchange are at multi-year highs