Commodity Prices Plunge Further As Fed Hike Looms Large

The price of copper plunged to a 6-year low on the back of fears that an imminent rate hike is likely in the US. Commodities traders jumped on the bandwagon and shorted copper futures, and sold the metal en masse as it slid $0.054 to $2.164 per pound early in the morning on Thursday, 12 November. Just after lunchtime, the price of the red metal had increased to $2.1690, but was still hovering around multi-year lows. When copper hit $2.160 per pound, it had erased any gains it made in the years since July 2009. On the LME (London Metal Exchange), 3-month copper dropped almost 2 percentage points to reach $4,828.75 per metric ton. Since May 2015, the red metal has lost 25% of its value, which points clearly to China as the culprit.

Copper Price 1-month Chart

We have seen a considerable decline in manufacturing activity in China, coupled with larger than expected declines in imports in September and October 2015. Year-on-year import declines were recorded at 20.4% in September and 18.8% in October. These figures are substantial especially for an economy the size of China. Consider that the consensus forecast for September was -15% and the consensus forecast for October was -16%. That the actual figures far exceeded forecasts is a clear indication as to the fundamental weakness in the Chinese economy. With respect to exports, year-on-year declines in September were 3.7% and in October 6 .9%. The latter figure is significant since the consensus estimate for declines in exports was only -3%. Viewed in perspective, this explains why metals and energy commodities have been facing sharp price declines and slack demand.

You may be wondering why China weakness is impacting so heavily on the price of copper?

China consumes 40% of all global copper produced. China is the world’s largest consumer of copper and also the world’s largest producer of copper. The fact that Chinese inflation data came in weaker than expected was a big indicator that demand in China is on the decline. This is predicated on a 1.3% CPI figure year-on-year in October. The inflation figure was 0.3% lower than the September increase (year-on-year). This is yet another reason why China pushed for its 6th interest rate cut in 12 months. The consensus estimate among economists was a gain of 1.4% in October (year-on-year) but instead China is moving in the opposite direction and further monetary easing is needed to kick-start economic activity. This will come in the form of rate cuts, bond purchases and the possibility of tax cuts at a fiscal level. For the first 10 months of 2015. Import figures have been lackluster. This has also been further impacted by slowing construction – all of which dampens demand for copper. Now what we see happening in EM countries especially is a surplus in copper inventories and slowing production as demand simply isn’t there anymore.