Copper price boost after China manufacturing jumps to 27-month high

Gold traders are seeing red

In pre-open New York trade on Friday September copper jumped to a high of $3.2555 a pound after data out of China showed manufacturing activity at a 27-month high.

The latest jump came after the Chinese manufacturing purchasing managers’ index (PMI) indicated that the world’s second largest economy accelerated into the third quarter.

The official manufacturing PMI for July came in at 51.7, up from 51.0 in June, the highest since May 2012. A reading above 50 indicates expansionary conditions for industry.

The output and new orders components picked up showing strong domestic demand, while export orders, which had been lagging also improved.

The HSBC/Markit manufacturing PMI which surveys smaller firms, increased to 51.7 compared to June’s 51 reading, also beating expectations and rising to an 18-month peak.

Private industry in China appears to have caught up to large state-led companies as Beijing improves access to finance for small firms and stimulate activity through infrastructure spending including rebuilding shanty towns and upping investment in rail and power infrastructure.

Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC expects policy makers to continue with targeted easing and “the cumulative impact of these measures to filter through in the next few months and help consolidate the recovery.”

China which consumes more than 40% of the world’s copper imports tumbled 8% in June to 350,000 tonnes compared to the previous month. The fall is blamed on Beijing’s crackdown on the practice of using warehoused inventories as collateral for trade finance after fraudulent transactions were uncovered at the major port of Qingdao.

However, year to date China is still importing refined copper at a record setting pace – up a whopping 26% over 2013 to 2.52 million tonnes.

Better than expected PMI number from other emerging economies in the region also boosted sentiment with India scoring the best reading in 17 months while Korea was the only country with a PMI still below 50.

While Friday’s eurozone’s measure of manufacturing activity fell back, at 51.8 it is still indicative of growth. The UK is also expanding with a July reading of 55.4.

Defying market expectations, the copper price dug itself out of a near four-year low struck mid-March of $2.92 a pound and has gained more than 7% since early June. The metal is now down only 4% in 2014.

The copper price is highly correlated with economic growth thanks to the widespread use of the metal in the construction, transport and power industries, and the robustness of the red metal is prompting industry to switch to much cheaper aluminum for some applications.