Copper bears ignoring Chinese manufacturing turnaround

Down the line

The copper price is having a torrid 2015 as economic news out China continues to rattle investors and bears discount any positive developments from the world’s number one consumer of the metal.

The release of China’s commodity-friendly five-year plan through 2020 released last week has done little to lift sentiment and even a stronger-than-expected reading of Chinese manufacturing activity released over the weekend could boost copper prices.

On Monday in New York trade December copper gave up more ground briefly dipping below $2.30 a pound ($5,070 a tonne), down 5% over two weeks. The copper price is down 17% so far this year after falling to six year lows in August.

The Caixin manufacturing purchasing managers’ index (PMI) for October jumped to 48.3, up sharply from a multi-year low of 47.2 the month before after an improvement in the new orders, output and employment at Chinese factories.

A reading below 50 indicates contractionary conditions and the index has hovered below this level for eight months straight.

Capital Economics in a research note is sanguine about the outlook for the Chinese economy saying that the index “has to be well below the 50 level for output to fall” and that October levels are “consistent with decent growth rather than the ‘hard landing’ that many still fear.”

China, the world’s second largest economy, is responsible for over 45% of total global copper demand of some 22 million tonnes and the country’s PMI data is particularly closely correlated to the copper price as the graph shows.

Chinese factories have turned a corner

Source: Capital Economics

A pickup in demand from China is also evident in customs data with imports of refined and semi-finished copper products surging by more than 30% in September compared to the previous month and 18% in the same month last year.

At 450,000 tonnes it was the highest monthly shipment total since January 2014 and the first rise since June last year. Year to date imports are still lagging last year’s however, falling 5.5% to 3.4 million tonnes.

September imports of concentrate fell 6.2% in September compared to the same month last year, but the disappointing figure follows a nearly 20% year on year jump in August. Year to date concentrate imports are up 9.3% to 9.33 million tonnes.

Capital Economics expects the copper price to recover towards the end of this year and into 2016-17. By end-2015 Capital Economics sees copper at around $2.72 a pound ($6,000 a tonne) rising to $3.17 a pound ($7,000 a tonne) by the end of 2016.

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