After a strong performance in February so far the copper price retreated on Thursday after disappointing manufacturing data in China gave pause to bulls.
In afternoon New York trade March copper – the most active futures contract – changed hands at just under $3.28 a pound, down on the day, but recovering from lows of $3.25 struck in early morning trade.
China is responsible for 42% of total global copper demand of some 21 million tonnes and the country’s preliminary or ‘flash’ manufacturing purchasing managers’ index (PMI) released Thursday showed domestic conditions continue to deteriorate.
The overall reading of the HSBC/Markit index fell to 48.3 in for February, the sixth month in a row of declines and the lowest level since July. A reading above 50 indicates expansion.
A sharp drop in new orders and employment were the main reason for the decline which came in well below expectations of an increase to 49.5 even after accounting for seasonal factors like the Chinese new year holidays.
Hongbin Qu, chief economist for HSBC in China said February’s slowdown reflects “renewed destocking activities” and “the building-up of disinflationary pressures implies that the underlying momentum for manufacturing growth could be weakening”:
“We believe Beijing policy makers should and can fine-tune policy to keep growth at a steady pace in the coming year.”
Other analysts do not agree that the People’s Bank have much room to stimulate the economy and see no signs of a shift towards loosening policy. Independent research house Capital Economics believes Beijing “made clear in its latest quarterly monetary policy report that it is still not comfortable with the pace of credit growth.”:
“As a result, we expect credit growth to slow further. That will help to contain China’s medium term credit risks, but it will also continue to weigh on the performance of the manufacturing sector.”
Given its widespread use in transportation, manufacturing and construction any economic slowdown would have a significantly negative impact on copper usage.
But today the copper price held up well, considering how weak the Chinese numbers were. The economic data is also at odds with China’s surging imports of the red metal.
The 536,000 tonnes of refined copper imported in January constituted a 53% jump over last year’s tally and 21% more than in December.
What accounts for the discrepancy is that the copper is not being put to industrial use, but because of tight credit conditions inside China stockpiles are being used as collateral for trade financing.
While China’s record imports have provided a floor for the copper price, these imbalances in the market are likely to correct itself in the future.
