Copper, China, and the Global Economy

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Copper and oil are important barometers of where the global economy is headed. For copper, the weather vane for its direction isn’t so much about supply as it is about demand. Here, we look to chinese industrial activity and the commitment of traders report as important signals on the demand side as it relates to the broader global economy.

When Large Specs or Managed Money funds reach extreme net long holdings of copper, hedging for higher prices, we look for signs of a top. From November 2016 to this past February, it was clear copper funds had reached extreme levels of optimism on price. Sucking so much of the buying potential out of investment funds with these record net long copper holdings made copper vulnerable. Once the major strikes subsided and the economy cooled, copper fell over 10% from its February peak. This market has been in need of speculative long liquidation before copper prices could find a bottom. Over the past 3 months, about 60,000 Managed Money fund contracts have been reduced. While our ideal buy zone requires another 40,000 to 80,000 contract liquidation, copper can work into a bottoming formation in the $2.30’s – 2.40’s without reaching such extremes.

copper mgd money

Another key tell for copper has been the manufacturing trends in China. As the world's largest consumer, China significantly affects the global supply and demand balance. Copper will even stay tethered to merely the perception of Chinese economic activity. Since 2011 when copper prices began to unravel, the Chinese manufacturing purchasing managers index (PMI) has been a roller-coaster ride around the unchanged level. When the Chinese PMI enters contraction mode under 50, industrial metal prices will accelerate to the downside. When their PMI entered the expansion mode during the 4th quarter of 2016, Copper prices surged on the expectations of increased consumption. When Markit last week reported China’s latest PMI falling perilously close to contraction mode near 50, copper prices fell sharply from $2.69 to $2.47 (8%) over the past 6 days.

China PMI vs Copper


Technically, this bull market in copper and base metals could risk failure if we move under the support zone we highlight in the $2.30’s to $2.40’s. It’s easy to see the correlation of major price moves with the movement of managed money flows and Chinese PMI trends, thus further fund liquidation of over 40,000 contracts or a China Manufacturing PMI reading under 50 would increase the odds of breaking our key technical support zone. A movement in copper under $2.30 toward the 2016 lows near $2.00 would be a bad omen for the global recovery which has gained in confidence over the past year. Given our outlook for continued global growth, we would favor renewed signs of economic acceleration from the US in the 2nd quarter and “eventually” China by the 2nd half of 2017 to keep commodity prices from falling too far.

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About Kurt Kallaus