Commodities | Aug 01 2013
On Thursday we get the the PMI for Manufacturing for China, and this is the litmus paper test for the economy. The market is building a lot of expectations into this number and the market is forecasting a weak result. This would indicate that the economy is contracting and not what we want to see as it would confirm to many traders that the Chinese economy remains soft and thus expectations on demand for copper would also be revised lower. Seasonally, August and September are a low point for demand however this time we have the additional concern that a weaker economic picture may prevail due to the efforts of the Government to reduce excess capacity in the economy, which may lead to weaker demand. Recently the CCP ordered 1400 companies in 19 industries to cut excess production capacity in an effort to help stabilize prices and provide a better footing for the economy to have sustainable growth. Apart from sizeable cuts to capacity for cement, steel and aluminum it has ordered 665,000t of copper this year to be cut. How would this affect the market?
We feel it all comes down to what “capacity” means. Capacity is the total amount that can be produced at any one time. Excess capacity is producing more that what is needed. This has been the mainstay of an economy that up until recently has averaged double-digit growth as demand has always been there. If demand softens and production remains unchanged then surpluses quickly emerge followed by price instability and low profitability. This is why the CCP ordered 1400 companies to cut excess production capacity. In doing so it could be argued that it effectively puts 665,000t of copper on the market, which should see the price of the significantly lower. However, as we have discussed before the very fact the surplus metal is tied up in financing deals means that the potential for an acute supply crunch as economies recover is eased some what due to the supply. So hopefully it will act as a balancing agent for the metal.
We continue to like the metal at these levels regardless and feel it is worthwhile getting a little exposure. Stops US295.
Chart Point
The market continues to consolidate but looks as if it will test the lower end of the range as it failed to push through the topside last week. It is important that stops be placed in the market below the US300 as a break here opens the way for a leg lower.
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