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“The cynics are right nine times out of ten.”
                                    H.L. Mencken

Commentary & Analysis
Copper: stomach-churning, to say the least …

Boy oh boy can copper move fast. It can also change directions rather sharply.

And that doesn’t usually make for a settling combination.

So what gives?

In commenting on the recent increase in Chinese imports of refined copper, one Reuters’ commentator suggested it was the lower price that led to the increase:

The price rout continued into October with most of the base metals hitting 2011 lows.

That will only have whetted further China’s appetite and September’s jump in imports may be a sign of things to come over the end of this year.

Indeed. Destocking of copper has come to an end as expected – many commentators suggested imports would recover in the second half of this year with restocking efforts as the driver.

Interestingly, copper prices haven’t exactly been mimicking the action in imports i.e. rising imports suggest rising demand; rising demand suggests rising price. In fact, it’s been more like a mirror image as prices have fallen for the better part of the last five months:

Copper futures, weekly:

We know that general market risk appetite has had a lot to do with copper’s decline. The eurozone is just as risky as ever; questions on China’s economic strength abound; the US is no bastion of economic prosperity – far from it.

But assuming US and eurozone officials can continue to stave off contagion with monetary Band Aids, copper’s future will depend heavily on the outlook for China’s economy.

And thus there is a key distinction to be made in the latest Chinese copper import numbers. While there has been considerable improvement, it is not necessarily indicative of an improvement in real demand, but rather demand from those looking to restock, those who will eventually sell it on to the copper consumer when demanded.

Further, copper might not be the best indicator of Chinese demand and economic strength. Indeed, China imports far more iron ore than copper. Demand for steel, the major end-product of iron ore, has been slowing. The expected output among steel makers has dropped notably. That has had an impact on the prices of iron ore. While iron ore imports have not dipped in line with price, a major decline in imports in October might trigger Chinese disappointment.

I shared this chart with my Commodities Essential members on Friday. What is most important at this juncture is the resistance I’ve circled:

The 40-week moving average is combining with some trend channel resistance; this is combining with re-renewed uncertainty out of Europe to weigh on copper prices so far this week. There are plenty of commentators out there suggesting that copper bears should be careful.

Understandable. But I just don’t see copper-specific fundamentals playing a lasting role considering the technical and global economic backdrop.