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Copper Is Volatile as Markets Weigh Demand-Supply Dynamics

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Copper volatile

On October 2, 2015, spot copper closed at $5,178 per metric ton in the London Metals Exchange. This was down ~1.8% from the previous day’s closing. Interestingly, copper had risen by ~1.6% on October 1.

The chart above shows the recent movement in copper prices. Copper prices have seen increased volatility over the last few trading sessions due to divergent newsflow from the demand and supply sides. The PowerShares DB Commodity Tracking ETF (DBC) can give you direct exposure to commodities.

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Demand

Goldman Sachs, which holds a bearish view on copper prices, estimates Chinese copper demand to be flat this year as compared to the previous year. According to Platts, quoting Antaike, Chinese copper consumption is expected to rise 6% year-over-year (or YoY) in 2015. On the other hand, according to the International Copper Study Group, Chinese copper demand has fallen 1% YoY in the first half of 2015.

Demand estimates vary between different agencies due to differing calculation methodologies. There are differing estimates of copper’s end use in China. However, looking at the slack in China’s manufacturing and real estate sectors, it seems reasonable that the country’s copper demand would be similar to last year’s levels.

Supply

There have been supply-side concerns, especially from Chile and Peru. Moreover, major producers, including Freeport-McMoRan (FCX) and Glencore (GLNCY), have announced supply cutbacks. However, the demand side of the equation is so weak that the supply side issues have failed to have any meaningful impact. According to the Financial Times, citing Merrill Lynch, “500,000 tonnes of additional cuts are necessary to rebalance the market.”

However, given the unit cash costs of some of the leading copper producers such as BHP Billiton (BHP) and Rio Tinto (RIO), further supply cuts seem unlikely at the current levels.

Along with falling copper prices, Freeport is also grappling with a fall in energy prices. We’ll discuss this in the next part of the series.

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