Commodity Blog

Commodity Prices – Copper

Copper fell as China’s manufacturing slowed. According to the HSBC/Markit report, China’s manufacturing declined in November with the fastest pace since March 2009. The Purchasing Managers’ Index dropped from 51.0 to 47.7 last month, the lowest level in 32 months.

The industrial metal may still rebound on the optimism about Europe and the positive economic data from the United States. The US manufacturing PMI rose from 50.8 to 52.7 in November, while the construction spending advanced 0.8 percent, two times the forecast value.

Copper traded at $3.5315 per pound today as of 4:51 GMT on COMEX, following the yesterday’s drop from $3.5560 to $3.5255 per pound.

Copper advanced as the sentiment about the situation in the European Union improved, boosting prospects for raw materials. Analysts are worried, though, that the optimism may be short-lived.

There’s the speculation that the International Monetary Fund prepared a loan to Italy. The officials denied the rumors, but traders felt their mood improving. In general, Monday was a day of ”risk-on mode” and most of commodities rallied.

Unfortunately for traders, there are many reasons for the rally to be short-lived. Moody’s Investor Service warned that the indecisiveness of the European leaders may lead downgrades for the credit rating of the European countries. The rating agency wrote:

The continued rapid escalation of the euro area sovereign and banking credit crisis is threatening the credit standing of all European sovereigns, cautions Moody’s Investors Service in a new Special Comment. In the absence of policy measures that stabilise market conditions over the short term, or those conditions stabilising for any other reason, credit risk will continue to rise.

Futures for delivery of copper in March rose as much as 2.7 percent to $3.3715 per pound by 13:14 on COMEX.

Both copper and gold performed in a similar manner in the recent past, but the outlook for the metals is vastly different. Traders are bullish on gold, but bearish on copper. Why is that?

There is actually a single reason for such different expectations: the European debt crisis. The borrowing costs of the European nations continue to rise, while the credit ratings of Europe’s countries continue to be downgraded by rating agencies. That’s unfavorable environment for industrial metals, but a blessing for precious metals.

So why gold doesn’t look like it’s “blessed”? There are different theories on this matter, but two of them sound most logical. Firstly, the crisis makes investors to run to the dollar and gold suffers from that as it’s inversely correlated to the greenback. Secondly, demand for the yellow metal an inflation hedge wanes as the slowing global economy means slower inflation growth.

Gold closed at $1,681.00 per ounce today on COMEX after opening at $1,693.80. Copper fell to the closing price of $3.2680 per pound from the opening of $3.2730.

Copper rebounded today after yesterday’s decline. Analysts think, though, that bears still have upper hand.

The main reason for traders to be pessimistic is the problems of the European Union. Europe makes up about 19 percent of global copper consumption, therefore its problems is very negative to the industrial metal.

Consumer confidence of Europeans fell to almost two-year low last month, according to the European Commission. The industrial production of the Eurozone contracted 2.0 percent in September.

The MSCI All-Country World Index of stocks declined 11 percent. The Standard & Poor’s GSCI Index of 24 commodities advanced despite the negative fundamentals, rising 3.5 percent.

Settlement on copper was higher today, rising to $3.4020 from $3.3605 per pound as of 8:20 GMT today on COMEX. Yesterday, the price was down from $3.4620 to $3.3605 per pound.

Both gold and copper was down yesterday and up today. But outlook for gold is bullish, while prospects for copper are not so good. The main reason for such different expectations is the situation in Europe that may increase demand for gold as a safe haven, but will certainly have negative impact on copper.

The European Commission released its growth forecast yesterday and it wasn’t optimistic. Gross domestic product of the European Union and the Eurozone is expected to grow only 0.5 percent. What made the Commission to look in the future with pessimism? The explanation was:

Three main risks are identified as weighing on the EU and the euro area economy: continued sovereign-debt-related uncertainty, the weakness of the financial industry and the sluggish world trade. There is a possibility of negative dynamics: slower growth could affect sovereign debtors and this, in turn, could deteriorate the condition of the financial sector, which would be unable to support growth.

Yesterday, Standard and Poor’s sent a message that France’s credit rating was downgraded, but later announced that was a mistake and the nation stays with its top AAA rating and stable outlook.

Gold traded at $1,768.20 per ounce today as of 3:31 GMT on COMEX after falling yesterday from $1,771.0 to $1,759.60. Copper spot price was $3.3695 per pound today, following the drop from $3.5640 to $3.3910 per pound on the previous trading session.

Most commodities fell as concerns about the debt crisis in the European Union and the slower economic growth of China and the United States made traders wary and unwilling to invest in risky assets. Gold was an exception, running to the upside.

The concerns about the upcoming referendum in Greece can be easily explained. Most Greek citizens are strongly opposed to the austerity measures required by the rescue plans for Greece and very probable negative vote will likely lead to a default of the European country.

There was another report suggesting about a faltering economic growth in the USA. The Purchasing Managers’ Index of the Institute for Supply Management dropped to 50.8 in October from 51.6 in September. Analysts promised an increase to 52.1. The index is dangerously close to the 50.0 level and a drop below this level would mean that the US manufacturing is starting to decline after 27 consecutive months of expansion.

Gold price rose today to $1,726.20 from $1,726.21 today as of 2:35 GMT on COMEX, following yesterday’s advance from $1,716.80 to $1,721.50. Palladium traded today near $638.0 per ounce after yesterday it dropped from $644.0 to $637.0 per ounce. Copper settlement was down from $3.5540 to $3.5130 per pound on yesterday’s trading session.

Copper futures jumped after the European leaders at last revealed some of their plans to resolve the unpleasant situation with debt in peripheral economies. Yet bears don’t feel completely smashed by the news as the rally of the industrial metal may end despite the support from Europe.

The European leaders agreed to increase the bailout fund. The European banks will voluntary write down 50 percent of Greece’s debt. Traders were waiting for good news from Europe for quite some time and after receiving such news were ready to risk in search of profit instead of playing safe. The resulting risk appetite spurred commodities across the board.

Bears aren’t disappointed, though, as the end for the European debt story is far away and the problems are still plaguing the Eurozone. China also makes the futures of industrial metals, and copper in particular, uncertain as the slower economic growth in the Asian nation can damp demand. And don’t forget that there is the US with its problems. All in all, copper currently is in good grace of traders, but its prospects are unclear.

Copper traded at $3.6970 per pound as of 2:07 GMT today in electronic trading on COMEX, following the surge to $3.6890 from $3.4880 per pound yesterday.

Industrial metals, including copper and nickel surged today, after the European Union summit ended this weekend and China’s manufacturing expanded. Among gainers were also aluminum, lead, tin and zinc.

The European leaders discussed the measures to support the region’s banks. They were also working on the plans to end the sovereign debt crisis that likely will be revealed at the summit on November 3. The forceful restructuring of Greece’s debt was rejected.

China was showing signs of slower economic growth and that was bad for commodities in general and for industrial metal in particular. Today’s report about China’s manufacturing brought some relief and encouraged traders to invest in metals. The HSBC Flash China Manufacturing Purchasing Managers’ Index increased to 51.1 in October from 49.9 in the month before.

Copper settlement advanced from $3.2190 to $ 3.4470 per pound today as of 23:50 GMT on COMEX. Spot price for nickel jumped from $945.90 to $996.0 per kilogram on MCX today.

The global economic turmoil and uncertainty about the recovery reduce appeal of commodities to traders. Copper, like most other industrial metals, dropped on the mounting signs of a slower recovery.

China’s gross domestic product expanded 9.1 percent in the third quarter from a year ago, showing the slowest pace of growth since 2009. The conditions for New York manufacturers worsened as was shown by the Empire State Manufacturing Index that was at -8.5 in October. The ZEW Indicator of Economic Sentiment for Germany declined to -48.3 in October from -43.3 in the previous month.

December futures for delivery of copper fell 0.5 percent to $3.36 per pound by 13:21 on COMEX. The prices have declined 26 percent in the three months ended September 30, posting the biggest quarterly drop since the end of 2008.

Metals, together with energy and agricultural commodities, extended its slump today as the debt crisis in Europe eats away confidence of traders.

Goldman Sachs reduced its growth estimates for the world economy and forecast recessions in Germany and France.

Moody’s Investor Serviced cut Italy’s credit rating to A2 with a negative outlook from Aa2, citing:

The main drivers that prompted the rating downgrade are:

(1) The material increase in long-term funding risks for euro area sovereigns with high levels of public debt, such as Italy, as a result of the sustained and non-cyclical erosion of confidence in the wholesale finance environment for euro sovereigns, due to the current sovereign debt crisis.

(2) The increased downside risks to economic growth due to macroeconomic structural weaknesses and a weakening global outlook.

(3) The implementation risks and time needed to achieve the government’s fiscal consolidation targets to reverse the adverse trend observed in the public debt, due to economic and political uncertainties.

The Standard & Poor’s GSCI index declined 1.6 percent.

Gold fell from $1650.40 to $1596.60 per ounce as of 22:51 GMT today on COMEX, following the jump to the daily high of $1675.50. Copper dropped from $3.0955 to $3.0775 per pound. Palladium declined from $586.70 to $569.50 per ounce.