Copper tumbles to six-year low
Copper prices tumbled to fresh six-year lows overnight on signs of weakness in China's economy.
The most actively traded contract, for September delivery, fell US3.4c, or 1.5 per cent, to settle at $US2.2870 a pound on the Comex division of the New York Mercantile Exchange. This was the lowest settlement since July 2009.
The London Metal Exchange's three-month copper contract fell 2.6 per cent to $US5,035 a metric tonne, after tumbling below the psychologically important $US5,000 level in afternoon trading to hit a six-year low of $US4,983 a tonne.
Copper's decline comes as all industrial metals continue to retrench from the boom-time peaks of 2011. As with other base metals, copper has suffered from concerns about a global supply surplus and fears about future demand from China, which consumes around 45 per cent of the metal. While many analysts say faltering Chinese demand will continue to lead copper lower, others predict prices will rise by the fourth quarter because Chinese buying will actually pick up at a time when global supply begins to fall.
"Psychologically, $US5,000 is a big, big number," Stephen Briggs, a metals analyst at BNP Paribas, said. "If it actually...stays below $US5,000, then it's sort of a point for further losses."
Tuesday's losses were triggered by a sell-off on the Chinese stock market, which ended the day down 6.2 per cent. Commodities have also been hit by China's surprise decision to devalue the yuan last week, making dollar-denominated metals and oil more expensive for the world's second-biggest economy.
The price of copper has now halved since its 2011 peak and is at levels not seen since 2009. Copper prices sank below $US3,000 a tonne in 2008 before climbing to a high of $US10,190 in 2011.
Many analysts believe that copper still has further to fall given the current fears for demand in China. A slowdown in Chinese manufacturing and construction would significantly reduce demand in copper, which is used mainly for wiring, pipes and roofing.
"We can easily see a 10 per cent fall from current levels," Atul Lele, chief investment officer at Deltec International Group, said.
The souring outlook on Chinese demand has led to bets on weaker copper prices. Speculative investors in copper futures and options have been net-bearish for 10 straight weeks, according to data released on Friday by the Commodity Futures Trading Commission. More recently, the number of open futures contracts has climbed to a record even as prices plumbed six-year lows, a sign that bearish traders are piling into the market.
"China's economy is worse than thought...you have people scared," Ira Epstein, a broker with Linn & Associates in Chicago, said.
Investors also believe that an expected rise in US interest rates will spur further gains in the dollar, making commodities even more expensive.
The plunge in copper prices has sent the shares in some of the world's largest miners tumbling while hurting economies from Chile to Zambia. Chile produces over 30 per cent of the world's supply of copper, which was responsible for almost 10 per cent of the Latin American country's gross domestic product in 2013, according to data provider CEIC.
Shares in US miner Freeport-McMoRan have fallen 83 per cent from its high in November 2011 while Toronto-based Barrick Gold has written off around $US4 billion from the value of a copper mine that it bought in 2011.
It could be a sign of Cycle low if it can get back above 5000 a ton.