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Silver, Copper Could Weaken Further If Chinese Economic Data Disappoints; Copper Breaks $3/Lb

By Debbie Carlson of Kitco News
Tuesday March 11, 2014 1:19 PM

(Kitco News) - Industrial metals markets are keeping an eye on Chinese economic data, particularly after recent data came in much weaker than anticipated and sent markets like silver and copper reeling.

With news such as an 18% drop in February exports, on top of concerns about corporate defaults and tightening credit industrial metals have been hit hard, with copper taking the brunt of the selling. Copper prices are down around 4.8% for the month, and at one point hit their lowest level since July 2010. Silver prices are down around 2.2% on the month and plumbed their lowest levels in a month.

After trading firmer earlier Tuesday, silver and copper are prices lower. At 11:20 a.m. EDT, Comex May silver is down 11 cents at $20.800 an ounce and May copper is down 8.15 cents at $2.9490 a pound.

More Chinese data is slated for release this week, and market participants are bracing for another round of soft results. The losses in copper are also stoking ideas that the metal might be foreshadowing a global economic slowdown, although that view is not universal.

Barclays economic analysts said several reports are slated for release this week, including industrial production, retail sales and fixed asset investments, among others.

“We expect modest downside risks, which is likely to keep sentiment around China negative,” they said.

Considering copper fell sharply after the last round of poor Chinese data, odds are this could be repeated if the data sets are weak again. That could pull down silver and other industrial metals, too.

Barclay metals analysts said in a visit to Chinese copper market participants last week, sentiment there turned “distinctly bearish since January as imports continued to flood the market while demand has yet to pickup.”

They noted that demand has weakened and supply has jumped. Further, weakening of the yuan has also meant less interest in using copper in financing deals, Barclays metals analysts said. That could mean further downside risks for copper, Barclays said.

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Copper Prices Fall, Pull Down Silver

Copper dipped under $3 a pound Tuesday and as it fell, the red metal pulled down silver, which was outperforming the rest of the metals complex earlier in the session.

Robin Bhar, head of metals research at Societe Generale, said silver’s earlier strength was based on both gold and copper strength, rather than anything fundamentally to do with silver.

Bhar is bearish on copper, and “reasonably concerned” about the outlook for the red metal, not only from a supply and demand standpoint, but also because of how the metal was used as collateral in the shadow banking in China. He explained how the metal was used.

“We would see copper stocks fall on the LME (London Metal Exchange), but rising in mainland China, as seen in the bonded warehouses. It wasn’t copper that was being genuinely used for physical buyers, but used as credit for collateral. When a lot of those loans were devalued, the credit turned tighter and (now there are concerns of) defaults, the worry is a lot of that copper that was used to back those loans could come back on the market,” he said.

Mike Dragosits, senior commodity strategist, TD Securities, agreed with Bhar’s views on copper. But he also said that the February Chinese data may have been skewed by the Lunar New Year holiday, noting that combined January-February exports are only down 1%. 

“We view China as still growing, but they’ve hit a soft patch here. We have three more indicators out … to add to the data and they (will likely) be soft. We’ll see what March and April will bring. But the Chinese government will still grow 7.5%,” Dragosits said, noting that’s the target the Chinese government set in their National People’s Congress.

Canary In The Coal Mine

A number of market watchers are concerned that the weakness in copper might portend global weakness down the road, with copper being the market equivalent of the canary in the coal mine.

While copper prices are down, more risky assets like the U.S. equity markets are shrugging off the Chinese data, said Janet Mirasola, managing director, metals group at Wells Fargo Securities.

“Here in the U.S. ‘all is well’ - equities only fell by a marginal amount yesterday (Monday), largely ignoring the clues that the Red One (copper) and its ability to lead economic trends….  During the great recovery in 2009 and 2010 copper was labeled the ‘PhD of the market’ as it became the poster child for growth and economic strength. Will it now be stripped of its diploma or should investors take notice and look to trim risk,” she said.

Richard Baker, editor of the Eureka Miner, also pointed out the divergence between copper and crude oil relative to gold, and noticed it has widened to levels not seen since the Arab Spring in 2011. It’s “hardly a good harbinger of things to come, I imagine,” he said.

The chart is from Richard Baker

Yet Dragosits and Bhar aren’t convinced the Chinese weakness will leak to the wider global economy.

“I think this is really limited to China more than the U.S. China uses more than 40% of the world’s copper and the U.S. is maybe 15%,” Bhar said.

Dragosits agreed, and said U.S. economic data may be improving anyway.

“We don’t see it spilling over to the rest of the globe. Part of the weakness in U.S. data was the extreme weather conditions … but maybe that’s reversing as seen in the (higher-than-expected nonfarm payrolls report from Friday). We will need to see more of this (improved data) in March and April,” he said.

By Debbie Carlson dcarlson@kitco.com
Follow me on Twitter @dcarlsonkitco



Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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