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Copper Breaches $5000, Breaks Below 15-Year Trendline
While the PBOC was literally everything in its power to keep the Shanghai Composite above its 200-day moving average as some sign of 'stability', it forgot about that other proxy of overall Chinese economic health: copper. And just as we warned previously, ever since the CCFD crackdown in 2012, copper has been tumbling and more crucially has just broken a 15-year trendline.
As we explained last year, Copper faces a double whammy that is only just starting to be realized...
Metals and mining commodities – including the base and bulk commodities, steel and cement – are highly exposed to a slowdown in the Chinese property, with over 40% of Chinese demand for cement and copper in particular consumed in the construction sector. The recent slowdown in Chinese property sales, prices and early-cycle new starts has most impacted physical demand for (and sentiment towards) commodities exposed to the earlier stages of China’s construction cycle – steel and iron ore – which have underperformed commodities more exposed to latter stages of the construction cycle, such as copper. However, as the recent slowdown in new starts flows through to late-cycle, copper-intensive construction completions, we expect copper to come under further pressure.
Understanding the construction cycle and commodity demand
The property development timeline for a typical Chinese building (such as an apartment building) from new start to property completion takes around 18 to 24 months. An “early-cycle” construction phase can be characterized as a period with strong new starts, relatively weak completions, and falling inventories (associated with higher sales). Conversely, “late-cycle” construction phases are typically associated with weak new starts, relatively strong completions, and rising/and or high property inventories (associated with weak sales). The intensity of basic material consumption varies significantly across these phases: consumption of steel and steel-making raw material (such as iron ore and coking coal) tends to be strongest in the earlier stages, while copper tends to be consumed in the later stages.
Specifically, as much as c.61% of Chinese and c.25% of global copper consumption is related to Chinese housing and property activity. Of the c.61% of Chinese consumption that may be related to property, up to c.45-50% is directly associated with project completion (plumbing, wiring for lighting, local power infrastructure, telecom, etc.), and c.12% is associated with the actual property sale, when the property is fitted with copper-intensive consumer appliances and/or tiling intensive in mineral sands. The strong link between completions and copper demand owes to the fact that internal and external copper wiring (for connection to the grid) tends to be installed around project completion. There is strong empirical evidence for the relationship between completions strength and copper prices: using completions as the primary indicator of China’s copper demand, together with ex-China demand data, explains the vast bulk of variation in copper prices over the past decade.
Bad news for copper
In 2012/2013, the Chinese construction sector transitioned from an early-cycle construction phase to a late-cycle one, as completions surged following a wave of new stimulus-related construction post the Global Financial Crisis. Since then, the cycles have been relatively muted, with both new starts and completions growing sub-trend, for the most part. More specifically, the observed weak growth in new starts over the past two years has bearish medium-term implications for late-cycle copper-intensive construction completions. In our view, this weakness has not been priced in, as it has not flowed through to the physical market via higher inventories, and therefore supports our bearish copper view over the next year ($6,600/t and $6,200/t at 6- and 12-month horizons).
Double whammy (at the margin): commodity financing deals
In the past three years, China has increasingly employed complex commodity financing deals to import relatively low-cost US dollar funding, which in some cases has likely been used to fund property development. While the profitability of these financing deals has already fallen owing to lower Chinese interest rates, higher rates outside of China, and – in the case of copper – persistent LME backwardation, we expect a further gradual unwind in such deals over the course of 2015 as China opens up its capital account gradually over time. This broader reduction in financing deals, combined with an expected rise in US interest rates, could result in higher costs of funding for Chinese property developers, potentially further slowing property starts and property-related commodity consumption. At the same time, a further reduction in deals would reduce demand for copper imports into bonded warehouses in China (a key component of the financing transactions), potentially raising inventory visibility outside of China. This scenario would be a double whammy for copper, which is both highly exposed to the property sector and supported by low visible exchange stocks.
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As Bloomberg reported earlier in the week,
The plunge in copper means almost one in five mines globally is losing money, Macquarie Group Ltd. said Monday. Some mines, especially in China, will have to cut supply or close if prices stay so low, analysts led by Vivienne Lloyd wrote.
While disruptions in mining have reduced supply, it’s not been enough to support prices. Copper producers are likely to miss production targets by up to one million tons this year, according to Commerzbank’s Weinberg.
“This should provide a cushion for prices, but in reality it doesn’t,” he said. “The market seems much more concerned about the demand side. It’s very much about the sentiment of the market and that has been quite bad.”
* * *
Low commodity prices must be unequivocally good for America, right?
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I've been trading a good long time and have no idea why I would possibly give a shit on a 15 year trendline.
What exactly would you give a shit about if you don't mind me asking......as an experienced trader of course.
Well, if one in five copper mines is losing money, and production is about to be cut, it means that the supply of silver will also take a dive...
so, according to the CFTC, there's no good reason why the silver price shouldn't plunge in 5, 4, 3, 2...
Yesterday silver crashed with copper, today its bucking coppers trend and hopping on the gold train. Then you have all of the new buyers in the gold market, Drunkenmiller, Goldman, and HSBC. Something is up, we just don’t know what yet.
I'm curious about that chart listing the % demand from construction sector for the various commodities. Cement is listed as 40-45%. What could cement possibly be used for other than construction?
I would say shoes but they appear fond of nail guns these days.
Most likely heavy highway has its own category.
You'd give a shit because of the whole growth can never stop meme. Breaking the 15 year trendline is an indicator that it just may be wrong. I mean, housing could never go down right? RIGHT? Awww fuck, BITCHEZ!
Everybody wants to rule the world.
The real rulers don't like that...
Copper is ON SALE! Keep stackin...morons.
this could be the point copper stays a commodity and silver becomes a precious metal once again.
i do not like copper eggs and ham, I do not like them silver i am
That trendline looks utterly meaningless to me. But, I'm not a trader.
If these mean anything to anyone. You can customize the graphs a little, but not much.
Historical price since 1989
http://www.infomine.com/investment/metal-prices/copper/all/
LME warehouse level since 1998
http://www.infomine.com/investment/warehouse-levels/copper/all/
Shit is getting real.....real fast !!!!!
This is the shape of things to come. Nobody is building anything, but the stock market sees no problem, so somebody is full of shit.....
Everything is going to crap and they're cheering it on.
It's like an alien invasion movie where all the idiots are on top of the building with welcome signs, cheering, right before they get blasted.
Only old timers build houses with copper pipe..PEX is huge around here..way cheaper, faster and easier to install than copper. I've never seen the numbers, but PEX has got to be killing demand for copper pipe and fittings.
PEX doesn't work in wind turbines.
Did China stop storing it in parking lots?
Everything is breaking down. Even old Yeller's power to levitate markets after a Fed announcement.
Times they are a changing
Come gather ’round people
Wherever you roam
And admit that the waters
Around you have grown
And accept it that soon
You’ll be drenched to the bone
If your time to you is worth savin’
Then you better start swimmin’ or you’ll sink like a stone
For the times they are a-changin’
"Does anyone know where the love of God goes
When the waves, turns minutes into hours?"
............................................................Gord Lightfoot
The truly funny part of all this is how the Fed fears the slowdown in China might have a depressing effect on the US economy when in fact, it is the non-recovery in the US that has caused the Chinese economy to slow.
SO ... with copper bucking the 15-year support and oil hitting $40/BL ....we're not talking a simple recession here.
I don't need to tell ya' that exports of US manufactured goods have had a downward tendline for a long time, and they are not showing a recovery.
The new Asian Crisis - is pointing to something pretty deep and pretty BIG !!!
It's a pretty good bet ... something smells bad inside the Chinese Shadow Banking system. There's a deeper hole there, than just Tianjin.
A REDEPRESSION(tm).
This commodity crash is eerily like August 2008 just before Fannie Mae, Freddie Mac and Lehman all went bust.
I think that this downturn could be WORSE than 2008.
That was the appetizer, this is the main course.
Small theory, China which was and still is the buyer of last resort said, " Ok assholes no SDR for us, well then we will sink this ship and you with it "
Why talk about Copper when you can talk about GOLD!
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What are global governments more inclined to do:
- Allow a full and true market clearing event to reset and reshape their economies?
- Push $$$/¥¥¥/€€€Liquidity into already diseased markets in the hope of propping them up and/or expanding debt, since this is what they're largely based upon since the early 1980's?
In light of what should be obvious, does copper have real, intrinsic value compared to paper currencies?
Credit has seized up in China. They need a collapse to fan the chaff from the grain. Seems like they (CCP) fear instability rising from such a collapse. The sooner it happens though, the better.
China has starved for a long time before, what is the difference this time? Is it the taste of prosperity that many have had, and the corruption recognized in their affluent "leaders"
Take the (temporarily) strong dollar out of the picture and see the real price of copper. Copper is UP against Asian currencies, the Yen, and the Euro.
I am still pulling copper pennies and stashing them in a jar, because I have no faith that the U.S. Dollar will remain this strong!
Which means it can get cheaper.
I think they have been mostly zinc for quite sometime now......
Gotta pull out anything before 1982 to get 95% copper. Lots of negative articles on doing this, but if it were 'impractical' then there would not be a law against 'exporting' pennies. Likewise, arguments are made that it is not economical because a penny might have less than 2 cents worth of copper. My thought is that no one stashing 1964 silver coins ever thought that silver would hit $2.00, but it did. Did they rush out and cash in at $1.50? Nope. Was it worth holding longer? I will hold mine until there is at least a 5x price advantage.
Funny you mention that. Gold is up YOY in Aussie and Canadian dollars, Japanese Yen, Indian Rupee, Russian Rubles, Mexican Pesos, South African Rand and the Brazilian Real but you don't hear anything about it.
Simple...Just tear down a bunch of shit and build some new shit!
Get to printing bitches!
Herr Doctor Copper.
My screens today revealed Dr. Copper informing Mr. Market that tomorrow is his turn at the podium to at last begin his 3-day Thursday-Black Friday-Blue Monday speech to the yellin' crowd.
See the copper monthly:
http://www.investing.com/commodities/copper-advanced-chart
broke 15-yr trendline? not hardly. this is a LOG-LINEAR graph !!!!!
but even if it was linear scaled ....
a line from the 2002 low through the 2009 low is hardly a trendline.
and they could have played with scaling all day long to get the bogus headline claim.