Paging Dr. Copper

Dr. Copper has been under the weather, as of late. After hitting record highs in mid-February, the metal has retreated close to 12% as of yesterday’s close.

As seen one can see on the chart above, the graph had been in lock-step with the S&P 500 (in green) up until late April, when price levels really began to deteriorate. The dramatic drop brought prices down to the 200-day moving average, where they have been consolidating since early May. A rather ominous feature of the above chart, spelling further potential downside risk, is the forming Death Cross of the 50-day moving average below that of the 200-day.

What has been driving prices lower is a rather slower growth outlook for global demand. According to a recent International Wrought Copper Council (IWCC) report, 2011-2012 demand is expected to drop from a five year average rate of 16.4% growth to just 8.4%.

A main influence in the near 50% decrease in expected demand is due to China. 40% of global copper demand is from China and recent forecasts of a Chinese economic slowdown have certainly contributed in a major way to the slump in copper prices.

Despite the doom and gloom in the technical and fundamental stories of copper, two mining giants are going head to head to fight for strategic copper mines in Africa. Asia’s biggest nickel producer, the Chinese Jinchuan Group Ltd., is taking on the world’s second largest mining company, Brazil’s Vale S.A. The two mammoth miners are looking to take over Metorex Ltd., with current bids putting the deal well above the billion dollar mark. The South African company owns strategic copper and cobalt mines located in the D.R.C. and Zambia.

Perhaps the two companies realize that while Chinese growth is slowing, the 9% growth rate expected in Q3 is still nothing to scoff at. Perhaps they are encouraged about the potential increase in Japan copper demand due to reconstruction efforts. Maybe they realize that copper supplies are being squeezed, with the largest source country, Chile, reporting a 3.9% drop in output during the first quarter. Whatever the case, it looks like we shouldn’t count Dr. Copper out just yet.

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