The price of copper fell 12 per cent this year due to macroeconomic worries on Chinese credit tightening, Russia-Ukraine tensions, sluggish Japanese and US economic data. These have led to an overall slide in industrial commodities.
The metal fell sharply 7.7 per cent to hit $6,490 a tonne on the London Metal Exchange (LME) on March 14. It marginally recovered on Monday to settle at $6,550 a tonne. This is the lowest point since June 2010. Its demand is being questioned further, as China, the world's largest consumer, sees exports and inflation contracting faster than expected.
"China's first domestic bond default sent fear ripples through the market that tightening credit was taking its toll. The future of copper's price is not necessarily based on past trends. Supply shocks are largely unpredictable (the Indonesian ban on exports of nickel have driven the S&P GSCI Nickel up 13.1 per cent in 2014) but can have a huge impact, specially in times of low inventory like the market is experiencing now.
The S&P GSCI has seen a copper shortage for four months straight as of February-end. This is significant since there hasn't been a shortage for five straight months since 2008. “If this continues, it will be difficult for copper to continue its losing streak," Jodie Gunzberg, global head of commodities at S&P Dow Jones Indices, said.
"There are a lot of questions around China's situation, including fading industrial and consumer demand, fear of more defaults across the financial spectrum and repeat of a 2008-like credit crunch. What is compounding the situation is the emergence of how much copper is being used as collateral. If there are worries in a general sense about the financial condition in China, copper is perhaps more exposed to that than others due to a substantial rise in Chinese inventory," said Navneet Damani, associate vice-president, Motilal Oswal Commodities Broker.
Copper, one of the leading indicators of global economic health, has been the worst performer among metals this year. The market is not factoring in basic supply-demand, and copper may have been oversold. In fundamental terms, the global copper market is fairly tight, meaning no long-term justification for low prices.
Rising mining cost also poses a threat to future supplies, and could underpin prices. In 2014, the real expense of producing might be 87 per cent higher than in 2007 due to high labour and energy costs. But, if copper price keeps falling, those holding it in warehouses will be forced to sell, which could push prices down further. Banks could be less willing to accept the metal as collateral, said Damani.
In the medium term, low prices will make it unattractive to commission mining projects, which will tighten the supply.
"Asian markets are set for another tense session as worries about China 's economy continue to reverberate, taking a particularly hard toll on commodity prices.
February's shock fall in exports from China has cast a shadow on the global outlook, even as analysts blamed much of the drop on the Lunar New Year holidays," said Kishore Narne, head, commodity and currency, Motilal Oswal Commodities Broker.
The US Federal Reserve will continue to trim its monthly asset purchases at a $10 billion pace, a Fed official said on Monday. He detailed how the US central bank might rewrite its plan for keeping interest rates low.
Europe and Asia 's industrial health will be closely watched in the coming week for an indication of how solid, or weak, a footing the global economy was on at the start of the year. With China 's leaders seeking to rebalance the world's industrial powerhouse more towards consumer spending, and with bad weather distorting most US data since the start of the year, some clarity would be helpful.