Dismal China data drops copper price back below $3

Gold traders are seeing red

In late New York trade on Tuesday, copper fell back below the psychologically important $3-level after weak housing data from China dented confidence in the strength of future demand from the consumer of 45% of the globe’s red metal.

Residential property prices in China fell 2.5% in October compared to the same time last year, the sixth month in a row of declines. Sales volume declined 1.3% during the month.

The property sector is a key component of China’s economy which is already predicted to expand at the slowest pace since the global financial crisis. The copper price is highly correlated with economic growth thanks to the widespread use of the metal in the construction, transport and power industries.

A new research note from Goldman Sachs cuts the investment bank’s outlook for the copper price and warns even the reduced prediction could turn out to be too optimistic.

Over the next six months Goldman expect copper to trade at $6,200 a tonne (some $2.80 a pound) down from earlier estimates of $6,600. The bank also cut its 12-month outlook to $6,000 a tonne ($2.72 a pound) from $6,200.

On the bright side a strengthening dollar (83% of global copper output is non-dollar denominated) and weaker oil prices will relieve some of the cost pressures on producers with marginal production costs falling to between $5,600 and $6,300 a tonne:

The bank said prices could fall below its estimates to average $5,600 a ton if China’s state stockpiling agency stops buying copper. The State Reserve Bureau will buy 500,000 tons of refined copper this year and 200,000 tons in 2015, supporting prices at around $6,200 to $6,300 a ton, according to the bank.

While slowing demand has been a drag on the copper price, a swing into market surplus next year after five years of deficits has been the main reason behind the 11.3% drop in the price this year.

An October report by metal consultancy GFMS predicts over the next six months, more than a million tonnes of new copper capacity, or around 6% of global mine production, will come on stream.

New mines in Peru, led by China Minmetal’s $6 billion Las Bambas project, coming on stream next year and in 2016 will double production to 2.8 million tonnes, placing the South American nation in second place globally behind Chile.

Other significant projects include First Quantum’s Sentinel project in Zambia which will add 300,000 tonnes starting this year, Southern Copper Buenavista expansion in Mexico will add 170,000 tonnes next year while the KGHM-Sumitomo Sierra Gordon project kicked off production of 220,000 tonnes per annum earlier this month.

The International Copper Study Group forecast the copper market should swing into a production surplus in 2015 of an estimated 393,000 tonnes. Analysts at Macquarie puts the surplus of refined copper at 475,000 tonnes this year.