Copper In Beijing’s Hands

By Jonathan Barratt

 

When it comes to copper it comes down to the economics of China. So far this week we have had little to cheer about on the economic front for the number one consumer of the metal. Tuesday's trade data continued to show a weaker front, however, the clincher for the metal will be the data due out on Friday. We we have GDP (Forecast 7.9%, last 8.1%), Industrial Production (IP) (Forecast +9.8%, Last +9.6%) and Retail Sales (Forecast +13.6%, Last +13.8%). This will provide us with a good handle on how the socialist market economy is doing. It is interesting to reflect a little on the IP numbers for China as these will provide a direct consequence for copper.

Industrial production numbers are important gauges of economic activity in manufacturing, mining and utilities. The figure simply measures changes in output of these sectors, which are then added up to provided a total. It provides a good gauge as to whether and economy is expanding or contracting. This figure is also used as an early warning for demand-pull inflationary pressures. When we analyze the data we work off the averages, as it is these that will show the state of play of the economy. In China the IP in 1994 reached an all time high of 29.4% and in Jan 1990 and all time low of -21.10%. It has averaged about 13.44 % since 1990 until 2011, which is in reality exponential growth, when compared to western economics. It is been under pressure in 2012 and in May it came in at 9.6%. This week we are expecting the number to be a little rosier coming in at 9.8%. A figure at this level or slightly higher would be supportive of the metal. 

China is ranked by far as the top consumer of copper, accounting for 3.64 million tonnes, then the US at 2.4 million followed by Japan, Germany and Korea. Recent price action has told us that any form of stimulus, whether global or from China, is seen by the market as a positive for demand for the metal and prices trade higher. At the beginning of the week we had low inflation data (+2.2% which is 0.8% lower than May) and this would signal to us that the authorities could provide more stimulus. We expect a drop in the banks' reserve ratio is just around the corner. So in light of this it will be interesting to see the numbers on Friday as regardless of the outcome they should be positive.

We continue to have a long bias towards the metal with the current position being long at US340.

 

 

Produced by Jonathan Barratt direct from the trading desks of Commodity Broking Services, Barratt's Bulletin provides expert analysis of commodity markets, global indices and foreign exchange movements. Click here to take a no obligation 21-day trial to Barratt's or to learn more visit www.barrattsbulletin.com. Content included in this article is not by association necessarily the view of FNArena (see our disclaimer).