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Why Copper’s Fundamentals Are Different from Steel and Aluminum

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Mar. 4 2016, Published 8:30 a.m. ET

Copper’s fundamentals

As we saw in the previous part of the series, although metal prices generally move in tandem, we saw a significant divergence in the price movements. Basically, along with the broader economic cycle, metal prices are also driven by different fundamental factors.

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Copper has been sliding

Copper has been among the worst performing base metals (DBB). Copper has been sliding for the last five years. Currently, it’s trading at less than half of its 2011 highs. The issues facing copper are a bit different from steel and aluminum. Although copper also faces surplus production, the surplus isn’t as acute as steel and aluminum. Also, unlike steel and aluminum, where Chinese exports spooked the global markets, copper’s problem has been the demand slowdown, especially in China.

Copper miners including Freeport-McMoRan (FCX), Southern Copper (SCCO), BHP Billiton (BHP), and Glencore (GLNCY) have been negatively impacted by the slowdown in Chinese copper demand.

China benefits if copper prices stay lower

Now, copper is among the metals where China actually gains if prices stay lower. The country is the largest copper importer. So, lower copper prices bode well for China. However, lower copper prices would also mean that China mines less copper domestically and relies more on imports—both refined and concentrates. China lacks copper reserves. It would make sense for the country to import more copper instead of producing it domestically when copper prices are trading at multiyear lows. This would mean that Chinese copper imports might not fall much despite the demand slowdown in the country.

Copper rose over the last couple of weeks. It recouped its 2016 losses. However, copper faces several near-term headwinds. We’ll discuss the headwinds in the next part of the series.

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