November 19, 2018 / 10:23 AM / 21 days ago

Commentary: 'Dr Copper' may be favouring fundamentals over trade politics

LAUNCESTON, Australia (Reuters) - Are the much-lauded predictive capabilities of copper starting to show that the divide between China and the United States on trade and investment, which was on full display at the weekend meeting of Asia-Pacific leaders, no longer matters?

File photo: Trucks are seen at a copper mine of Jiangxi Copper in Dexing, Jiangxi province, China. REUTERS/Stringer

The failure of leaders of the 21-member Asia Pacific Economic Cooperation (APEC) to agree on a joint communique for the first time in the group’s history after the summit in Papua New Guinea was blamed on the tensions between the United States and China.

Trade was blamed for the inability to reach a consensus, and that’s hardly surprising given the ongoing stoush between U.S. President Donald Trump and Beijing over trade tariffs, which has resulted in downgrades to Chinese economic growth.

The outcome of the APEC meeting would normally be viewed as a bearish indicator for copper, given escalating trade tensions are likely to have a negative impact over the medium to longer term for the industrial metal.

However, in recent weeks there are signs that the copper market is starting to shrug off political concerns and focus more on supply and demand fundamentals.

Copper is often viewed as an early indicator for economic health, hence its nickname as ‘Doctor Copper’, the base metal with a doctorate in economics.

Copper for delivery in three months time on the Shanghai Futures Exchange was largely steady in early Asian trade on Monday, managing to hold onto recent gains.

It rose as high as 50,240 yuan ($7,239) a tonne in early Monday trade, up 6 percent from its year low of 47,370 yuan on Sept. 5.

London three-month copper futures closed at $6,205 a tonne on Nov. 16, up 7.5 percent from their year-low of $5,773, reached on Aug. 15.

While London copper is down 14.4 percent so far this year, and Shanghai by 13.4 percent, both have staged modest recoveries in recent weeks, despite the ongoing U.S.-China trade war rhetoric, declines in global equity markets and slowing indicators such as weaker Purchasing Managers Indexes (PMIs).

FUNDAMENTALS TO THE FORE?

Instead the copper market appears to be focusing more on some tighter indicators on the supply side, and still strong demand from top consumer China, with the expectation that this will continue as Beijing takes steps to boost the economy through stimulus spending on infrastructure.

In the first major deal between a Chinese smelting company and a copper miner, it’s believed that Jiangxi Copper and Antofagasta have agreed 2019 copper treatment and refining charges (TC/RCs) at $80.80 a tonne and 8.08 cents a pound.

The charges agreed between Jiangxi and Antofagasta are down from the 2018 benchmark of $82.25 a tonne and 8.225 cents a pound, Reuters reported on Nov. 15, citing three sources familiar with the agreement.

Lower TC/RCs are normally an indicator of a tighter market, either through a lower supply of unprocessed ore or through increased smelting capacity.

China’s imports of unwrought copper did drop in October from September, declining by 18.7 percent to 423,000 tonnes, while those of copper ores and concentrates fell by the same percentage to 1.57 million tonnes.

However, for the first 10 months of the year, China’s unwrought copper imports are up a robust 17.2 percent, while ores and concentrates have jumped by 19 percent.

There are also a few signs of tightness in inventories, with Shanghai stocks dropping 5.3 percent to 134,744 tonnes in the week to Nov. 16, less than half of what they were in late March.

Headline inventories in London Metal Exchange warehouses dropped by 5,425 tonnes to 161,025 tonnes last week, nearing last month’s 10-year low of 136,675 tonnes.

It’s not unusual for copper, or indeed any major commodity, to become embroiled in a tug-of-war between what fundamentals are pointing to and what political risk is saying.

Right now, copper seems to be paying more heed to signs of emerging tightness in the market than to the risks posed by the trade spat and a more general slowing of global growth.

However, before becoming too bullish on copper, it’s worth bearing in mind the industrial metal has a solid correlation with the China PMI, and the official measure has been trending weaker since May, and at 50.2 in October, was only barely above the 50-level that separates expansion from contraction.

If the China PMI turns higher in coming months on the back of Beijing’s stimulus, then copper’s recovery should be confirmed.

The opinions expressed here are those of the author, a columnist for Reuters. 

Editing by Joseph Radford

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