Dr Copper making way too much of China devaluation
The rally in the copper price on Monday after strong Chinese import numbers came to an abrupt halt on Tuesday following the country’s surprise currency move, widely seen as a response to slowing economic growth.
On Tuesday in New York trade September copper dropped to a fresh six-year low, exchanging hands for $2.338 a pound ($5,154 a tonne) at the close after an earlier dip to $2.314 earlier, a more than 3% fall.
Given its widespread use in the communication, transportation, manufacturing and construction industries copper is perceived as a bellwether for the mining and metals sector as a whole.
The red metal is also sometimes referred to as Dr Copper for its ability to provide a prognosis of the health of the global economy. Down nearly 18% year to date, copper is making dire predictions.
The People’s Bank of China jolted markets overnight after lowering the renminbi’s daily reference rate against the US dollar by 1.8%, the largest such adjustment in its history.
It was widely interpreted as a defensive move amid an economic slowdown in the world’s second largest economy and top commodities consumer.
Shares of mining companies and metal prices fell sharply in response as the devaluation makes commodities priced in USD more expensive and could dampen demand from China even further.
Capital Economics in a research note on Tuesday argues that the kneejerk reaction on markets is overdone and that the PBOC move may not be such a big deal.
Julian Jessop, Chief Global Economist at the independent research firm, says while the move has been interpreted as a devaluation and another shot fired in the currency wars, markets have been too quick to dismiss the official explanation – simply a “one-time correction” to bring the yuan in line with prevailing market rates:
“Today’s move does go a little way to reversing the appreciation of the renminbi in trade-weighted terms as a result of the de facto peg to the strengthening dollar. But it only makes a tiny dent in that broader appreciation.
“Similarly, if the aim were to counter the deflationary pressure from lower global commodity prices (which is unlikely, since this form of imported deflation is surely welcome), a much bigger move would be required.
Capital Economics expects the renminbi to come under renewed downward pressure but that the Chinese central bank would “resist this pressure (as it has done over most of the past year), rather than continue to ratchet the reference rate lower.”
“As well as the political sensitivities, allowing further big falls would encourage ‘one-way’ speculation,” the report notes:
Talk of this triggering a fresh wave of global “currency wars” is clearly overdone. Most currencies have still fallen substantially further against the US dollar:
Jessop does point out that countries that trade closely with China “are obviously more vulnerable” and warns that “if we are wrong, and the PBOC makes no effort to prevent the market from pushing the renminbi sharply lower in the coming days, further falls elsewhere are likely.”
On Monday customs data showed imports of copper held up well despite the economic slowdown in China, which is responsible for roughly 45% of total annual global copper demand of some 22 million tonnes.
Imports rose nearly 3% in July to 350,000 tonnes compared to last year – the first time since May 2014 that import were positive on a year on year basis.
Some of the buying was due to bargain hunters and stockpiling, but Beijing’s stimulus measures are also beginning to feed through to industry.
And it’s also an indication that currency move may well be just a one-off adjustment and not a panic reaction to slower growth.